Compound Interest? I’ll start saving when I’m damn good and ready!

How many times have you heard, “Save early” and “Save Often”? How about “Time in the market beats timing the market”? There’s a reason they are said ad nauseam and the evidence behind them is powerful. Here are some examples demonstrating the true magic of saving early and leveraging compounded interest to drastically change your life.

The following is a letter to my children showing the realities of saving early and the magic of compounding interest. Prepare to be enlightened and avoid my mistakes.

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Does Saving When Your Young Really Matter?

Dear Procrastinators,

I was lectured to start saving early many times by your grandparents, but it went in one ear and out the other. Afterall, I had plenty of time to work that “stuff” out. I was living in the moment and spending whatever funds were available to me… even some that were not.

“I’ll start saving when I’m damn well good and ready!” I once told my mother. Don’t get me wrong, youthful experiences are well worth it. I don’t want to discourage you from exploring the world after leaving the “nest”, but I do want you to consider a very modest investment in your future by taking advantage of time and the magic of compounded interest.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. Compound interest is the most powerful force in the universe. – Albert Einstein

Compounded Interest Examples

Instead of boring you to death about what compound interest is, Here’s a quick video explanation.

Let me show you how the magic works in practice. Take a look at this table and you’ll see that saving just $500 a month during your twenties nets over $1.2 Million Dollars. For clarity, here’s the legend for the table I’ll be using:

Monthly Savings – Money saved each month for a given time.
Years – The amount of years you saved that amount.
Invested – What you contributed during that time.
Growth – Interest you received while investing over those years.
Balance – The compounding of investments that rollover to make up your total assets.
Final Value – The final dollar value of a particular time after compounding.
% of Final – The percentage of your entire portfolio’s value during a savings period.
Assumptions – 7% interest based on historical market returns with a reduction for allocations, taxes, expense ratios, and fees.

You earned $1,181,363 by 70 for saving just $60,000 in your twenties! What if you delayed the savings until you were Forty?

For the same $60K, you’ve now only earned $260,792. You’ve lost nearly a million dollars by delaying 20 years.  Like me and many others, we procrastinate and do not start saving early enough. That’s why I was so persistent in trying to get you to understand the importance of making your money work for you with our RoosterMoney experiment.

If I Could Do It All Over Again

I’m curious to see what impact saving earlier would’ve had on my own life. Suppose for a minute that the flux capacitor existed and I was able to send a simple message to my 10 Year old self. It said…

Give your Mom or Dad half your income a week and invest in a broad market index fund. Forget about it until you are 65 years old. – Your future self

Had I saved earlier as a Paperboy

Let’s go back to the 1980’s…

I earned my first buck as a newspaper carrier with 74 deliveries a day. I netted about $45 a week, but completely wasted it. I bought soda, candy, and copious amounts of baseball cards. The money was totally discretionary at that point. I had no expenses or desire to save.

Years later, those 10 paper bags full of baseball cards were sold for $5 by your grandmother at a yard sale. I still have the best ones in protective sleeves, but they were worth more in the 90’s than today. Not the best investment, but trends come and go.

If I took my future self’s advice and invested half in a custodial account, I would still have 50% to spend on all that kid nonsense that brought be joy back then. I held this paper route for 5 years and those contributions would have grown to $203,280 by age 65 with only $6,000 invested.

The rule of 72 has determined that your money doubles every X number of years depending on interest.  It would have certainly happened for me. Unfortunately, time machines do not exist. I couldn’t possibly heed the advice of my future self, but I hope you will.

Wish I had saved some Cash from teenage jobs

As soon as I became of working age, I did the typical jobs. I was employed at a movie theater, gas station, construction site, and laborer with an event planning company. The money was actually pretty good, but I spent most of it on “wants” rather than “needs”, which left nothing to save or invest.

Looking back, there was enough income to put away $100 a month without sacrificing the joy of teenhood. Did I really “need” to eat at the pizza joint all the time or cruise around town in my beat-up Oldsmobile playing crazy games with CB radios? Of course not, but I could still have enjoyed those activities quite frequently.

What’s crazy is that my potential paper route contributions of the same amount is worth $58,344 more over time. Even this early, there’s a drastic difference in how compounding interest can help you in the long run.

Saving in my twenties

This was a rough time in my financial life, like most people discovering adulthood. I got married, had kids, juggled minimum wage jobs, went back to college, joined the military, deployed overseas, bought my first house, invested in real estate, and all kinds of activities related to “growing up.” Your mom had finally graduated with a doctorate and became a well respected and sought after pharmacist. She grew up much faster than I. Her income kept us afloat while I took some risks.

I always had the best intentions, but didn’t educate myself before making drastic decisions. Your grandfather was successfully managing rental properties, so I attempted to do the same. Let’s just say, real estate didn’t work out for me. We were making quite a bit more than our living expenses, but my rental property ended up costing us a fortune. Had I put our money in less risky investments, I would’ve had an additional $1,050 to invest each month without everything that went along with my landlord horror story.

It’s amazing to me that I squandered $2.2 million future dollars. Also, the $6,000 I could have invested as a kid would have double the return on investment as the $126,000 saved during my twenties. Had I known what I do now, your future would be secure through inheritance alone. I apologize for that and hope you teach your children what I’m sharing with you now.

Saving in my thirties

The thirties are over for us. Your mom settled into a lucrative career and this was when I caught my big career break. I don’t think I’d do anything different being in the same position. We finally became aware of all that I have preached thus far and ditched the money pit rental property. We did quite well in our thirties, both professionally and financially. We’re on track for a semi early retirement.

Where are we now

I’d say we’re lacking compare to the hardcore Financial Independence (FI) crowd, but ahead of the average person. I regret that I lost nearly $800,000 of compounded interest from failing to start saving earlier, but there is nothing I can do about it now. We’re in a good spot. Glad I educated myself during my thirties rather than discovering the concept of FI later. If I could do it all over again, the family would have an additional $799,872 as of today. With compounded interest… $2,206,872, if we let it grow until 65.

Your mom and I didn’t start investing heavily until our thirties. I wanted to capture missed opportunities and the table only shows pre 30 contributions. If you’re mom had saved early as well, we’d probably be retired by now. Don’t procrastinate like we did.

Delaying the power of compounding interest is like waiting until your dead from obesity before deciding to eat healthier. Click To Tweet

Ok…a bit morbid, but you get the point.

What I Encourage You to Do

I wish we sacrificed those earlier instant gratifications and put that money in the market instead. You don’t have to save much in the beginning, but as I’ve shown you…it will drastically improve your situation later on. Let’s see how you can become financially free earlier without much suffering.

In this recommendation, I’m going to assume you take a typical career in Corporate America. Should you decide to go into business for yourself or pursue other opportunities, you’re income will track similar progression. However…if you are the next Warren Buffett, Mark Zuckerberg, or Elon Musk…don’t read my letters anymore and go change the world.

Saving as a kid

We used the RoosterMoney app to track your childhood income and expenses as well as exposing you to the benefits of compounding interest. If you completed all chores and saved half of what you earned, you can contribute $20 a month.

Look at that…you just made $40,656 on a $1,200 investment. Did you really miss that 5th nerf gun? Say you’re 10 years old and spent $40 on that nerf gun. That one time purchase of $40 would cost your 65 year old self $1,653. When I buy something nowadays, I try to consider how much in future dollars this is costing me.

Saving as a teenager

As a teen, you’re primed to make a little money and have relatively few expenses. We’ll cover most of your costs, but you may want to splurge on a few things. It’s a difficult time when pride and social acceptance is quite important to you. A little cash toward a car, night out with friends, dates (with parental acceptance), and hobbies are worthwhile quality of life improvements. If you save the amount that I should have and consider inflation, you’ll be able to put away $200 a month.

You just made a free $1,802 dollars during your teen years and increased your future self’s net worth by $289,871 by simply socking away $200 a month.  Not too shabby.

Saving as an entry level employee

You’re off to college and enter the competitive workforce. If you choose the right major, you’ll be making decent income compared to your peers. This is the age of discovery and setting up a foundation for the life you want to lead. We’ll go a little conservative here while you establish yourself. Invest $215, or whatever the amount is to max your company’s 401K match. Contribute $460 a month to reach your annual Roth IRA limits.

Congratulations! You’re already a Millionaire at 65 and only invested $61,763 by age 25…and that’s not counting your company 401K match.  Without saving another penny, you’ve set yourself up with a substantial nest egg and well on your way to financial freedom. I realize the early years of college and entry level positions put you in a precarious situation to make ends meet. Every young adult experiences this once they become independent. All it takes is the awareness of compounding returns and to forgo things that don’t truly bring you happiness.

Saving during your mid career

This is when you’ll start to see extreme growth in your salary and have the experience to shop yourself around. Develop communication and “in-demand” skillsets. You’ll reach a Six figure income in no time. Here we’ll use an investment optimization strategy and max contributions to all retirement accounts with $2,000 a month.

Keeping lifestyle inflation in check and taking advantage of 401K and IRA tax benefits, you’ve hit “Coast FIRE” by age 32. Having nearly $3,000,000 by age 65, without investing another cent, is a great accomplishment that frees you from working any job you don’t enjoy. You’re now able to choose what you want to do as long as you can cover expenses. Retirement is fairly secure if investments are left untouched and compounding interest can do it’s magic.

Earn more and retire early

Perhaps you enjoy what you’re doing and want to become truly financially independent and retire early. You are promoted to a senior level position and get a substantial raise. Your tax advantaged accounts are already maxed annually. Now we build funds that can be used without penalty before the legal withdrawal age. Let’s add $2,000 a month to a brokerage account.

By age 40, you are a millionaire! Let it compound for another 25 years and you’ll have $5,637,743. I’ll reiterate, you don’t need to do any type of work that you don’t enjoy with this type of nest egg. Just cover your monthly expenses and don’t draw cash from your investments.

“FU Money”

There’s this phrase called “FU Money.” I think it’s self explanatory, but you already have enough to avoid suffering through a job you don’t enjoy. Tired of working altogether? Want to ensure you have enough to live on without earning another dollar? Let’s move up to the executive career level where the salary allows you to save double.

By 50 years old, you have $3,369,757. This portfolio can generate $11,233 per month for expenses IAW a study conducted by Trinity University. Anyone can live comfortably on that amount. You’re not even at the “catch up” contribution age and may enjoy 15-20 more years of your life without the financial burdens of most people.

If you did fun jobs to cover expenses until 60 and didn’t bother with all the strategies to access retirement accounts early, you’d have $6,628,821 by age 60 and over $9 Million by 65. Now that’s a luxurious retirement.

Retire even earlier

No person educated on compounding interest should work a job they aren’t passionate about after age 50. There’s 1000 different ways to achieve financial independence, but I’m just giving you one road that was similar to mine. You’ll see quite a few FI bloggers retiring before 40, but their savings rates are well over 50%. What does that look like?

Living frugally and investing heavily in your youth will grow to $2,008,761 by 40. Most who retire early still continue making income through means of the own choosing. That $2 Million provides their safety net of $80,000 a year to cover the cost of living.

However you choose to build your net worth, the most important thing to remember is that TIME is your greatest tool. Invest early and your future self will thank you.

Sincerely,

Dad

–End Letter–

Compound Interest Calculations

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Love to hear in the comments below how saving earlier helped you achieve your financial goals.