Reasons to Save Early
Why Start Saving Early?
There are many reasons to save early. For one thing, the sooner you start the more motivated you will be, and that money in the bank will start accumulating. In addition, if you ever had an emergency you will have an amount of money to help you out, and you won't need to take out loans or ask family and friends. However, the most important reason is...
Compound Interest
In essence, compound interest means that you obtain interest on the money that you have earned on interest. For example, if you save $100, with a 4% interest rate compounded annually, you would have $104 after the first year. However, after the second year you would 4% of $104 instead of $100. While this may not sound like much, after a few years it really adds up to become a formidable amount.
To give an example of coupound interest in action, let's talk about a hypothetical situation. Let's say person A and person B both save $1,000 a year, earning 10% interest annually. Person A starts at age 20 and stops when she is 30. Person B starts at age 30 and stops when she is 65. At the end of the period, person A will have almost $100,000 more than person B, even though she saved a lot less money!
Graph Showing Coupound Interest in Action
(From the Congressional Institute, August 18, 1999)
As you can see in the graph, compound interest is very powerful, and its effects are amplified the earlier you start saving. As a result, start saving as soon as possible to maximize your returns when you cash out!