The extraordinary power of compound interest

The extraordinary power of compound interest

The power of compound interest

If you are young, you may not think you need to invest or open a retirement account. You probably think it is easier to worry about it five years from now — or ten. You're wrong. Time is on your side now, especially when it comes to compound interest.

No matter what your age,now is the time to begin saving for retirement. In The Automatic Millionaire, David Bach writes, “The single biggest investment mistake you can make [is] not using your [retirement] plan and not maxing it out.”

Saving is the Key to Wealth

The only way to attain the wealth you desire is to spend less than you earn and to save the difference. The rich are not rich because they earn a lot of money; the rich are rich because they saved a lot of money.

You may be skeptical. I was once skeptical too. But many books I have read on the subject of wealth-building have convinced me — books like Stanley and Danko's The Millionaire Next Door make it abundantly clear that it is not a high income that leads to wealth — though, obviously, a high income does not hurt — but saving.

Those who become wealthy do so by spending less than they earn. There is no other source of saving, and, by extension, of building wealth.

If saving is the key to wealth, then time is the hand that turns the key to unlock the door. There is no reliable method to quick riches. There are, however, proven methods to get rich slowly. If you are patient, and if you are disciplined, you can produce a golden nest egg that will hatch later in life. It might appear that the pittance you save now could not possibly make a difference, but that is because you haven't considered the extraordinary power of compound interest.

The Power of Compound Interest

The best way to ensure your future financial success is to start saving today, even if all you have seems like a paltry sum. “The amount of capital you start with is not nearly as important as getting started early,” writes Burton Malkiel in The Random Walk Guide to Investing. “Procrastination is the natural assassin of opportunity. Every year you put off investing makes your ultimate retirement goals more difficult to achieve.”

The miracle of compound interest is the secret to getting rich slowly. Even modest returns can generate real wealth given enough time and dedication … mainly time.

On its surface, compounding is innocuous, even boring. “So what if my money earns less than 3 percent in a savings account?” you may ask. “What does it matter if it averages 8 percent annual growth in a mutual fund? Why is it important to start investing now?”

In the short-term, it doesn't make a huge difference — but don't let that fool you. On the slow, sure path to wealth, we need to keep focused on long-term goals. Short-term results are not as important as what will happen over the course of 20 or 30 years.

Related >> Find the best high-yield savings account for you.

Growth of a Single $5,000 Contribution

For example, if 20-year-old Britney makes a one-time $5,000 contribution to her Roth IRA and earns an average 8 percent annual return, and if she never touches the money, that $5,000 will grow to just under $180,000 by the time she retires at age 65, as you can see from this chart:

You can see how the money earned dwarfs the initial investment more and more as time goes by.

If she waits until she is, say, 40 to make her single investment, that $5,000 would only grow to less than $40,000. (On the chart, the red dotted line shows you the total value after 25 years is still less than $40,000.) Waiting 20 years will cost her more than $130,000 in “free” money. Time is the primary ingredient to the magic that is compounding.

Growth of Annual $5,000 Contributions with Compound Interest

Compounding can be made even more powerful through regular investments. It is great that a single $5,000 IRA contribution can grow to more than $170,000 in 45 years, but it is even more exciting to see what can happen when Britney makes saving a habit. If she were to contribute $5,000 annually to her Roth IRA for 45 years, and if she left the money to earn an average 8 percent return, her retirement savings would grow to more than $2 million, as you can see from this chart:

A golden nest egg indeed! She will have more than eight times the amount she contributed. Again, the dark green portion of the chart dwarfs the light green, which is the money she put in.

This is the extraordinary power of compound interest.

Related >> See a guide for Roth IRA rules and requirements.

The cost of waiting one year

It's human nature to procrastinate. “I can start saving next year,” you tell yourself. “I don't have time to open a Roth IRA — I'll do it later.” But the costs of delaying your investment are enormous. Even one year makes a difference. Every year that Britney in the example above waits, she loses one year at the end of the chart. In the first example representing a single investment, waiting one year will cost her almost $14,000 (the column highlighted in red).

Like many people, she may be tempted to think she is only losing the first year's return, i.e., around $400, but that isn't the case. She is actually losing the last year's return ($14,000), not the first. That is a steep price to pay for a single year of procrastination.

The difference is even more dramatic when you look at what Britney loses by waiting a year even though she contributes regularly to her savings. If Britney makes annual contributions of $5,000 to her Roth IRA as shown in the second example, waiting just one year will cost her more than $150,000! That is probably more than her annual income.

There is another way to look at the cost of procrastination. If she still wanted to have a $2 million nest egg at age 65 but she waits five years to get started, her annual contributions would have to increase to nearly $9,500 — that's almost double! And if she were to wait until age 40, she'd have to contribute nearly $55,000 a year!

How to Get Rich Slowly

You can make compounding work for you by doing a few simple things:

1. Start early. The younger you start, the more time compounding has to work in your favor and the wealthier you can become. The next best thing to starting early is starting now.

2. Make regular investments. Don't be haphazard. Remain disciplined, and make saving for retirement a priority. Do whatever it takes to maximize your contributions.

3. Be patient. Do not touch the money. Compounding only works if you allow your investment to grow. The results will seem slow at first, but continue on. Persevere! Most of the magic of compounding returns comes at the very end. Compounding creates a snowball of money. At first, your returns seem small; but if you are patient, they will become enormous.

The GRS Introduction to Roth IRAs Series

Understanding how important it is to get started saving for retirement, check out the rest of our Roth IRA series to learn about how to start your Roth IRA, which investments are best, and other general questions about these great accounts.

Part 1: The extraordinary power of compound interest
Part 2: What is a Roth IRA and why should you care?
Part 3: How to open a Roth IRA (and where to do it)
Part 4: Which investments are best for a Roth IRA?
Part 5: Questions and answers about Roth IRAs

More about...Investing

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TosaJen
TosaJen
12 years ago

One strategy I’ve taken up the past few years, is to max out my 401(k) as quickly as possible. I work at a company in an industry that regularly has layoffs, usually around mid-year and the end of the year. When I figured out that I could max out my 401(k) by August if I went to the max 30% 401(k) withholding my company offers. I figure that that will mostly cover a year’s 401(k) savings in time for a June layoff, just in case I don’t get much more into a plan the rest of the year. I don’t… Read more »

Sam
Sam
5 years ago
Reply to  TosaJen

Mr. Sam is doing a similar thing, he is contemplating a job move later this year. So he is maxing out his 401k early at his current job assuming he won’t be eligible at a new job for a few months.

Since I pay the bills, I prefer regular and steady contributions but we are making it work.

Sky
Sky
5 years ago
Reply to  Sam

I would only caution you both to consider the company match. Maxing out your 401k early in the year could leave money on the table, since company matching is capped per paycheck, and not based on your total contribution throughout the year. To get all of the “free money” your company would give you, make sure you hold back enough of your investment so that you can continue to contribute from every paycheck in an amount that maximizes the company match.

ART
ART
5 years ago
Reply to  Sky

That depends on the particular company’s policies – always a good thing to read carefully. Mine makes a once-a-year match based on the previous year’s contributions, and the cap applies to the annual amount.

Sarah
Sarah
12 years ago

I don’t have the option of contributing to an IRA through my employer. Can you do this on your own? If so, should you, and how? I have to admit to being totally clueless on this. I have some money invested, but otherwise I am basically sitting here waiting until I get a “real job” (I’m currently on a graduate fellowship).

Ryan
Ryan
9 years ago
Reply to  Sarah

My employer cut out our 401K plans when the economy went through its tumble and we all rolled our 401K plans to Traditional IRAs. I dont get the benefit of the company match anymore but Im sure to contribute the max of $5,000 each year. I also opened a Roth IRA because plain and simple, it benefits younger people in a big way, all capitol gains(profit I take from the stock market) grow tax free. I look at it this way, I don’t count on anyone but myself to supply for my retirement and I want to comfortable when that… Read more »

Sam
Sam
5 years ago
Reply to  Sarah

Not knowing your financial circumstances its hard to say, but if your employer does not offer a 401k and you earn money more than likely you can contribute to an IRA (and take a tax deduction) or contribute to a Roth IRA (after tax money, but no tax at withdrawal).

I find the Fidelity.com web site very helpful so here’s a link on FAQ (you probably also want to check out the IRS web site). https://www.fidelity.com/retirement-ira/ira-rules-faq Obviously they want you to invest with them, but there are lots of options.

Ross Williams
Ross Williams
5 years ago
Reply to  Sarah

Yes, you can contribute to an IRA. If you are not making much money, then a Roth IRA probably makes the most sense since you are in a low marginal tax bracket. It also means you can take the money out with no penalties if you need it in an emergency. Its really a perfect savings vehicle for someone just starting out.

Sam
Sam
12 years ago

This is my first year in a “real job” as Sarah says above, and I’ve maxed out the UK equivalent of the Roth IRA – a cash ISA. The max amount allowed is equivalent to $6000 this year, but is going up to $7200 after the 5th of the month. I plan to max this out each and every year and let compounding do it’s thing, however this type of account is cash based and so (while being very safe) it’s only likely to provide a 6% return or there abouts. It’s possible invest in a stocks and shares ISA… Read more »

trb
trb
12 years ago

@Sarah – you’re in the perfect position to start a Roth IRA. You can do it on your own, and since you’re not making much now, the tax situation works to your benefit. Read up on JD’s series of Roth IRA posts by starting here: https://www.getrichslowly.org/roth-ira-vs-traditional-ira-which-is-the-best-deal/

Yes, you can do this on your own, even if you’ve been uninvolved in the past. And JD’s best line in the post is right on: The next best thing to starting early is starting now.

The Financial Philosopher
The Financial Philosopher
12 years ago

This post is a classic lesson in leverage. In this case, the “lever” is time: As the length of time increases, the power of leverage increases exponentially…

On a separate, but related note, it sure is a shame that the term, “leverage,” has evolved into a representation of “using other people’s money” for financial gain. Leverage is quite useful and may be used in a context of money, time, knowledge, wisdom, influence, and more…

“Give me a lever long enough and a fulcrum on which to place it and I shall move the world.” Archimedes

Sarah
Sarah
12 years ago

I needed this post right about now, so thanks for writing it.

I’m in the middle of ALMOST opening a Roth IRA in order to be able to contribute for 2007, but I was also thinking about skipping 2007, and just trying to max out 2008. Now that I see the difference a year makes, maybe I’ll try to max both! April 15th is quickly approaching…

(Now, of course, picking which one is the hardest part.)

Hannah
Hannah
12 years ago

Very good post! Thanks to compound interest, the people who save early do have more retirement savings. Mentally, starting early has a greater impact as well. I’ve found that people who have been putting a couple hundred dollars into their retirement account every month since their early 20s are used to putting that money aside and have no problems continuing saving.

However, those who started later see the benefits much less and have much more trouble sticking to their plans.

J.D.
J.D.
12 years ago

As a side note, I’m compiling my Roth IRA posts into an e-book. I wrote this piece as the introduction to that book.

Mike Kingscott
Mike Kingscott
12 years ago

A great post, one which has helped me make a decision between saving money or using it to pay off debt – thank you!

SomeGuy
SomeGuy
12 years ago

“The next best thing to starting early is starting now”

Definitely the best line in the post. Someone told me the same thing years ago in a different way:

“The best time to plant an oak tree is 15 years ago. The second best time is RIGHT NOW.”

Keonne
Keonne
12 years ago

Wow,

I went and found an online calculator to figure out how much my little nest egg will be.

Im currently 19 and I contribute $10,500 annually to my SIMPLE IRA.

40 years @ 8% = 3 mil
45 [email protected] 8% = 4.5 mil

Hot damn! I love compounding interest

Keonne

Paul Gragon
Paul Gragon
8 years ago
Reply to  Keonne

Then drop dead at 65 saved all your life ,I worked and saved all my life ,would not do it again,get it spent enjoy yourself ,we are only here for a short time

getagrip
getagrip
5 years ago
Reply to  Paul Gragon

By starting early, you only need a small portion of your annual salary. Then you can use the rest of your salary to enjoy your today. I’ve been saving 10-15% of my salary since working full time and I feel if I died tomorrow I have lived. You don’t have to be a miser, especially with an early start and some reasonable investing.

Beth
Beth
5 years ago
Reply to  Keonne

Love that calculator.

elisabeth
elisabeth
12 years ago

I’ve taken some comfort in the fact that the 8% year isn’t a sure thing–it makes me feel better that I haven’t lost quite as much as I might have if only I’d started earlier…
I’m thinking this because yesterday a CD of mine came due and the MOST I could get from the bank where that money is sitting is 2.5%. (I know, I know, I should move the money somewhere that would pay more, but electronic banking isn’t close enough to the mattress for me…)

Mrs.ThePoint
Mrs.ThePoint
12 years ago

I am new to the retirement plans. Just started a ROTH IRA last month after reading this blog but I still have questions. My retirement funds is in a target date fund (since I am not experiences with the stocks)but I notice, the more money I put in, the more value I lose because the current stock market is so down.I am starting to question how my IRA suppose to compound? I feel I am compound losing right now. Should I keep on putting money in there? (It is a 2040 fund to be exact) Also,what stock you guys would… Read more »

Alea
Alea
5 years ago
Reply to  Mrs.ThePoint

I think the number one reason most people don’t invest is because they don’t understand how to invest. In your case, a target fund is a good beginning, but you can easily create a balanced portfolio with three simple index funds. For example these are my funds and costs with Vanguard where I have my ROTH. Vanguard Total Bond Index Fund Vanguard Total International Index Fund Vanguard Total Stock Market Index Fund This way you have bought the entire market. Then you need to decide how to divide the funds. Let’s say you are 25 years old. You can have… Read more »

getagrip
getagrip
5 years ago
Reply to  Mrs.ThePoint

When you say the more money you put in, the more you lose, is it a set percentage of loss? If so, you may want to review the fee structure and costs associated with putting money into the fund. Could be your funds, even in a ROTH, are front loaded, so they may be taking some percentage (say 5%) off the top in fees. You also may be getting hit with a maintenance fee because you haven’t built up a lot of money in the fund yet. It could be how the paperwork was set up and how the taxes… Read more »

Dave
Dave
12 years ago

Very nostalgic post, J.D. It took me back to old skool GRS.

Will
Will
12 years ago

There’s a reason why posts on the power of compound interest are usually well-received. Most people don’t realize how powerful a wealth-building tool it is! Even if they think they do, it usually takes an illustration like that post to make them truly realize what they’re missing out on.

One more thing. There’s a flip side to compound interest. That flip side is compound interest that you are CHARGED for purchases on your credit card. Avoiding that is as crucial as taking advantage of earned compound interest.

Sheldon
Sheldon
12 years ago

What I don’t get is where the 8% comes from? Over the last 10 years the market has been flat. If I invested $5000 ten years ago I would have a grand total of probably less than $5000 because of fees. I’ve been looking into where I should put my retirement money and it’s not easy.

Alea
Alea
5 years ago
Reply to  Sheldon

Index funds my dear Shelton, index funds, if you can help it stay away from high fees actively managed funds. Here is why: Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow… Read more »

getagrip
getagrip
5 years ago
Reply to  Sheldon

In this “flat” market of ten years with nothing but index funds I have more than doubled my retirement account which is now triple the value of the money I put in over the years.

Just because someone can show mathematically that $5000 put in at year X is now worth $5000 in year X+10 is no reason to believe that $5000 put in every year for 10 years starting at year X will only be worth $50,000 at year X+10.

No Debt Plan
No Debt Plan
12 years ago

We’ve started as early as we can — 23 and 22. One of the things we are going to request from our friends and family when we plan to have kids (several years down the road) is money to put into a custodial account. Imagine what $1,000 at Age 0, given 60 years to compound, would result in? We’ll also do a 529 plan, but I really want to save $1,000 and see what happens.

For the curious, at 10% return, that’s $304,481. 🙂

Justin
Justin
12 years ago

I’m a recent college graduate with student loan debt. I was planning on quickly paying off my loans and then start saving, but now I’m not so sure. What should I do?

getagrip
getagrip
5 years ago
Reply to  Justin

There is no “wrong” answer IMHO though many may say different. Paying ahead on the debt removes a burden from you quicker and if you then turn all that money around and invest it you’ll probably “catch up” pretty quick, assuming you have the discipline to do that. On the other hand, if you got a company match, you could put in enough to max the company match, then all the rest towards the loan extending the loan but gaining “free” money. If you get no company match, than there is the idea that some money saved will help many… Read more »

Daniel@youngandfrugal
12 years ago

I’ve been on the fence for a while about whether to start a Roth IRA now or in a couple months when we move into a new house. I think it’s going to be June when I start them for us, because then we will be sure that we have enough money to cover our down payment and our closing and moving costs. I’d hate to have to dig into the Roth for extra funds after I open it. The real question: is it better for my wife and I to fund separate Roth’s or are there any advantages to… Read more »

Jim E
Jim E
12 years ago

Great site. I’ve got a question I’d love to ask, specifically about the Roth IRA: Say a person had earned income in previous years, and contributed to a Roth IRA… but this year had no earned income, for whatever reason. What’s to prevent the person from going ahead and contributing to a Roth this year as well? It’s not declared on the 1040 (which would show the earned income problem), so who would step in and say “no”? Somebody way down the road, at the time when the Roth is tapped decades later??? I’m sure there’s a good argument against… Read more »

No Debt Plan
No Debt Plan
12 years ago

@[email protected]: You can’t have a “joint” Roth or Traditional IRA. IRA = Individual Retirement Account.

So fund one, and put the other person as the beneficiary if you die. Fund it to the max, and then open up a second one.

MoneyBlogga
MoneyBlogga
12 years ago

What a great article. I wish I could turn the clock back, which I cant, so instead I’ll wish to win the lottery to make up for lost time 😉

kpow
kpow
12 years ago

@Daniel and No Debt Plan: A more fair way in the possibility of divorce is to fund one for you and one for your wife equally, instead of fully funding one and not the other. Hopefully this wouldn’t be an issue, but as they are individual accounts, one can’t be too safe.

jamuraa
jamuraa
12 years ago

Whenever I read posts like this, I get an intense sadness, because I feel like I am already behind everyone else who is posting here. I am currently almost 30 and I have never been in a financial situation where I can contribute to a Roth IRA or 401(k) account. Part of this is because I have been in school for almost a decade now (4 years undergrad + 5 years grad school) and a student’s salary is not enough to support any type of saving. I feel like I’ve made a stupid decision to further my education and attempt… Read more »

getagrip
getagrip
5 years ago
Reply to  jamuraa

You are where you are and first priority is survival. My only recommendation is if you have a steady check coming in, peal some of it off to a separate account as automated savings you don’t touch or only touch in an emergency, even if it’s only $10 a check. I have always found the greatest barrier to savings to be the initial set up, of automatic withdrawls, of opening new accounts, of saving for specific items, etc. Once the account is open, even if you move and have to set up new accounts, you are already in the habit… Read more »

J.D.
J.D.
12 years ago

Sheldon wrote: What I don’t get is where the 8% comes from? Excellent question, Sheldon, and worthy of a follow-up post. Long-term, the market has increased in value at an average annualize rate of X%, where X is 6% or 8% or 12%, depending on how you’re making the evaluation. (In the post that comes later today, the author uses 13.4% as his number.) I choose 8% because it seems reasonable to me based on my research. But you’re right — this topic deserves a deeper discussion. It’s a part of basic financial literacy. I may even try to write… Read more »

Jim E
Jim E
12 years ago

@JD:
Got it: the IRA contribution is reported to the IRS, who presumably will check the contribution amount against what the tax return says is allowable. Simple answer to a simple question; thanks!

J.D.
J.D.
12 years ago

@Jamuraa Don’t be sad! Don’t dwell on the past. Instead, focus on what you can do now or in the future. If you’re still in school, you might not be able to contribute to your retirement. That’s okay. Your investment in your education is just as valuable. It’ll allow you to catch up in the future. Just be aware of the power of compounding, and seek to use it to your advantage when you’re able! Personal finance is all about trade-offs. And while the power of compounding is not to be ignored, sometimes one has to opt for another choice,… Read more »

My.cold.dead.hands
My.cold.dead.hands
12 years ago

This was a great article.

I was thinking of a way to turn all of my nephews attention to personal finance without putting them to sleep, the oldest one is going to be 17 in a month.

I sent them a link to this article as well as a copy of ‘The Richest Man in Babylon’.

My hope is that even if they just pay lip service to this, the fact that they know this info will be indicting to them and help them to get back on the right path.

elinor
elinor
12 years ago

Jamuraa,

I too was in grad school and my husband and I did not contribute to anying till we were in our 30s (post-secondary teachers). The lessons in frugality you are learning in grad school will be useful for the rest of your life! We have contributed every year since we started working–yes, you are losing your 20s as a time to invest, but there is no substitute for the great job of teaching. We want to work forever!

BTW, will be starting my own blog on this very subject next summer–be on the lookout!

girlwithglasses
girlwithglasses
12 years ago

This is so frustrating to me, because I don’t have a 401k anymore through the small business I work for, and I do have an ING account for long term savings, and I rolled my 401k from a previous job into a trad. IRA that I fund monthly, automatically. I save a little over 30% of my take home every month, but I am 28, a graphic designer, and I am no where NEAR maxing out my IRA. And I don’t really see a way to cut corners to get there. Charts like that don’t make me feel good about… Read more »

Miranda
Miranda
12 years ago

I love my Roth IRA. One thing that you also need to remember at this time is Don’t Panic!

I have been getting questions about whether it is time to cash out a retirement plan before the market crashes. The answer is NO.

As mentioned in this great post, the idea is to keep investing for the long term. And in the long term, the stock market gains…

plonkee
plonkee
12 years ago

@Sam:
Investing really isn’t that frightening once you start doing it. If you have a pension, that will be invested in stocks and shares, not in cash because the return on cash is dangerously low over the long term. Nothing is risk-free.

I wouldn’t normally self-promote, but I have just written a series on investing in stocks and shares ISAs for beginners, and I’m sure you can become comfortable with a suitable level of risk.

Brian
Brian
12 years ago

JD-
Possibly your best blog yet!
I always wish I had started saving earlier…who doesn’t. But I’m glad the wife got me to start when I did. It’s never too late. As you said, don’t dwell on the past…mentally it will make it tougher to invest. Focus on the future and you’ll mentally be much more ready to start today.

C
C
12 years ago

Mrs. The Point – I have similar concerns and sometimes feel like I’m throwing my money away investing in my IRA which keeps going down lately. Which is why I haven’t fully funded it for 2007 yet and am still on the fence about doing so. The thing that helps me, is remembering that you are buying cheaper shares now since the market is down, so you can buy more of them with the same amount of money. Buying more shares should make a bigger difference when the market goes back up! You have to be in this for the… Read more »

Susan
Susan
12 years ago

My question: You are talking about “compound interest”, but seem to be referring to investment accounts.

As I understand it, “compound interest” refers to a fixed interest that is guaranteed, and builds steadily over years…like the interest on a savings account. But with a 401k or IRA, neither the principal or a profit is guaranteed to be there.

I understand the point being made, and agree. But is it correct to call investment income/profits “compound interest”?

Hildy Richelson
Hildy Richelson
12 years ago

What most people don’t realize is that the majority of the long term returns on stocks came from dividends. With most stock dividends paying less than 2 percent right now it makes sense to put your money into safe bonds. With safe bonds you do not have to worry about market fluctuations because your bonds will come due at face value at maturity.No one seems to place much value on not loosing money. In reality if you lose less, then you do not have to take the risks to make more. Bonds provide that alternative to risk taking, which can… Read more »

J.D.
J.D.
12 years ago

That’s a great question, Susan. Compound interest and compound returns are twins. The same principles apply to each, but they refer to different things. In the post, I tried to use three terms: compound interest, compound returns, and compounding. Though the title does say compound interest (because that’s the term most people are familiar with), in the post itself, I’ve tried to keep the terms in their correct locations. I may or may not have succeeded. 🙂

Lisa
Lisa
12 years ago

I am not so old that I don’t remember when I was that age, and people kept telling me save save save.

But did I listen?!?

I’m kicking myself now!

Lisa

Heather
Heather
12 years ago

I’m aware of how compound interest can make you wealthy, but my problem is that it takes all your life before you are wealthy. The people I read about in the Millionaire Next Door were old dudes before they became wealthy. And they spent the majority of their lives working well over 40 hour weeks at lame jobs and living an extremely frugal life. I’m all about being frugal, but I just can’t get myself into the idea of pushing myself to save 10 percent of my income when there are so many more attractive things I could spend it… Read more »

Alea
Alea
5 years ago
Reply to  Heather

Oh Heather!!! you are already a winner, you are still around. Look at it this way, there are no instant riches, that’s how suckers lose their money. Say you are going to make it to old age anyway, is it really that hard to put 10% away and have security in your old age? You don’t have to start with 10%. Start with 1% then 2% the next year and so on. Instant gratification is not everything, will you remember all the stuff you spent money with nothing to show off other than a receipt from Goodwill? Also, you don’t… Read more »

Brian
Brian
12 years ago

Heather-
It’s too bad you feel that way. Sometimes pushing away small immediate gratifications mean you get to experience such great ultimate rewards.
Of course, most of the world agrees with your immediacy, and as such, we have 7 year car loans, 5 years “no interest” furniture loans, and bankruptcy rates increasing every year.

Phil A.
Phil A.
12 years ago

Having a nice nest egg as you approach retirement is a great thing but what if you die right before you retire? That would truly suck. All that money that you had planned on spending in your golden years would go unused by you. That said, I’m still planing on saving money every month for my retirement 35 years away. I just really hope I’m not shot or run over at age 65. This would make a really chilling twilight zone episode actually. Have a character who spends his/her entire life saving money for a wonderful retirement die of a… Read more »

Alea
Alea
5 years ago
Reply to  Phil A.

I’d rather die with money in the bank, then be old and standing in line at the food bank. It’s as simple as that.

sanspiral
sanspiral
12 years ago

Heather, I hear you. (Brian, I understand your response, too, and agree with it generally, but in response to Heather, I think it was a bit glib.) Deciding where to draw the line between enjoyment in the moment vs. saving for the future is a very personal decision that will be different for everyone. No matter what you decide for yourself, though, one way I’ve read which might help you is to do a budget (as rough or detailed as you want), figure out what your monthly expenses are, and with the remainder, allocate a certain percentage of it for… Read more »

My.cold.dead.hands
My.cold.dead.hands
12 years ago

Yes it would suck to die (just before retirement or otherwise) but at least you can then leave your fortune to those you love and insure that they will be able to attend college, retire and otherwise have lives without financial worries. If not to a love one then leave the money to a cause or charity that you care about. At least something that you believe in will be able to prosper due to your efforts. I chose this route over leaving my survivors with a pile of bills and otherwise in the lurch. Then again, maybe it’s more… Read more »

Brian
Brian
12 years ago

maybe mine was a bit harsh, but it disgusts me to see how everyone has an over-active tendency to only look at what they get at the moment. This board is called “get rich slowly” for a reason. Wealth, at least lasting wealth, is not immediate. It’s made over time. When you are able to delay pleasure, the pleasure ends up being that much stronger.
And to the question of “what if i die before i retire”? Ummm…I doubt you’ll think too much about the fact that you didn’t have a chance to spend the money you saved….you’ll be dead.

perries
perries
12 years ago

Justin, this morning you asked: “I’m a recent college graduate with student loan debt. I was planning on quickly paying off my loans and then start saving, but now I’m not so sure. What should I do?” When I was in this position, I split the difference and paid the loan payments as they came due, but also saved for retirement. I wasn’t able to max out retirement, but I didn’t want to lose out on the compounding advantage. Ultimately it depends on your individual situation factors like: the amount of your loans, the interest rates on your loans (how… Read more »

TosaJen
TosaJen
12 years ago

@Heather: I was pretty much “live for now” before DH and kids, so I get where you’re coming from. However, I hate to think of anyone working at 75 to pay for basic living expenses. You can enjoy your life without living like there’s no tomorrow. My dad pointed out to me early that if you contribute just 1% to your paycheck to a 401(k), you won’t even notice, because that amount is removed before taxes. Suppose that 1% is $50. But you’re probably only reducing your net take home pay by $35. And you can increase it as you… Read more »

sanspiral
sanspiral
12 years ago

@Brian: “maybe mine was a bit harsh, but it disgusts me to see how everyone has an over-active tendency to only look at what they get at the moment. This board is called “get rich slowly” for a reason.” I agree with you completely. It’s just that in response to any **specific** person, we never know exactly what their situation is, so I feel it’s not fair to judge them. Especially when Heather said “I nearly died a year ago.” We have no more info. than that, but I can certainly see how a near-death experience would make someone want… Read more »

Steven
Steven
12 years ago

@Sarah I have my Roth IRA with Dodge and Cox. You’re in luck because they just reopened their Dodge and Cox Stock fund to new investors. It’s a value fund and it has done very well for me and has very low expenses. (800) 621 3979. I have my traditional IRA with T Rowe Price. I have it in their Equity Index 500 fund. They have a very low minimum if you add to it every month (dollar cost average). 800 225-5132. Invest in either of these funds and you will be able to sleep at night. Hope this gives… Read more »

Heather
Heather
12 years ago

Thanks for all of your answers to my question. I guess it was written in haste, because I do think it is valuable to save oney and plan for retirement, I’m just not so much worried about starting right away if all I’m losing is a chance to be a millionaire. I do want a decent nest egg, something like a few hundred thousand dollars that could be put into CDs or bonds so that I could live off of the interest. But to start now on saving for that would mean I would have to get a full time… Read more »

CommOddity.us
CommOddity.us
12 years ago

Great post! I’ve linked to it on my blog.

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