Start Saving Early and Watch Your Nest Egg Grow

Most people agree that it is important to save.
When should you start?


Most people agree that it is important to save. However a question that often comes up is what is the right time to start saving. Several people suggest starting as early as possible to ensure a secure retirement. While you may agree that starting early makes sense, you may also believe that starting early is for the rich. Or you may even agree in principal but feel that you just can’t save right now.


So why is it so important to start saving as early as possible? The answer to that is quite simple really. It is the power of compound interest. Over a period of time your money will compound. Your investments will generate profit, and then that profit in turn will also earn a profit. So getting an early start on saving offers you a very lucrative and simple way to make your money grow.

Here's an example.

Assume that an individual starts saving $1000 per year at 22 and stops at 30. Assume that another person also saves $1000 per year. However, he starts at 30 and stops at 65. Now if they were to earn an interest of 10% on their savings who do you think will have more money at retirement? You may be surprised to hear that the first person will net a larger nest egg when he retires. Although the first person invested only $8,000, by the time he turns 65, his net earnings will be $380,865. On the other hand, the second person will save $35,000 by the time he turns 65. However, his net earnings will be $294,039 which is exactly $86,826 less than the first person’s earnings. So when it comes to saving, the early birds have a definite advantage over the late starters.

The first person saved $1000 per year for 8 years. The second person also saved $1000 per year but after 35 years of saving they still did not have as much at 65 years as the first person did. Now let your imagination run wild and try and conceive how much the first might have had if they had kept up their annual saving routine.

In today’s economic climate however $380,000 is nowhere near sufficient for most people to maintain their lifestyle once they retire. Consider that well over 50% of workers reaching retirement age do not have sufficient funds and survive on handouts and welfare. Is this the way you would want you and yours to be when you and they reach retirement?


The importance of starting saving early to maintain your lifestyle on Retirement
A simple formula

Having established the importance of starting early, the question that often comes up is how much to save. Here is a simple rule of thumb that should net you a decent enough amount to meet your retirement needs. This is assuming that you were to start saving at 25 when you land your first job. Now you can save 10% of your income till you turn 30. Five years later, once you turn 30, you will be well established in your career and may also be receiving a substantially larger pay check than when you first started out. Now you can consider increasing your saving to about 20% of your income. You can step up your savings in every subsequent decade of your life. So even as your paychecks become larger and larger you can correspondingly save 30% of your income in your 40s, 50% of your income in your 50s. This averages out to a saving of 30% of your income since you were 25 which should be a sizable amount for you to retire on comfortably.

It might even be a better idea to maintain an increase in savings with each wage rise. Should you not do so you may tend to accept any increase in pay as an increase in spending and this is not really good for maintaining your savings mindset.

As you can see getting a head start on your saving and saving at a steady rate will ensure that the effects of compound interest are amplified so that you can maximize your returns when you cash out!

It is not necessary to wait until you start work to commence your savings. Nor is it necessary to wait till then to start learning about saving and budgeting. Perhaps it would be wise to consider searching for ways to supplement your budget or income from your very first pocket money days. It is widely believed today that developing your savings mindset should be taught from your earliest school years.