The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 5. Time Is as Valuable as Money

Investment Compounding? Yes, It Is Truly Magical

The best day to start is today.

Make no mistake: Turning ourselves into committed savers is no easy task. Retirement seems far away. The sums we need to amass appear daunting. Controlling our spending is a struggle.

To make matters worse, our first few years as savers can be awfully discouraging. In those early years, when our nest egg is tiny, we won't get much help from investment gains. Instead, the key driver of our portfolios' growth is the raw dollars we sock away. Yet, if we can get through those discouraging initial years and accumulate a modest portfolio, the rewards can be immense—and we should begin to see the wondrous benefits of starting early.

Paying Upfront

What benefits? There's the obvious: The earlier we begin saving, the less we need to sock away each month to achieve our goals—and the more help we should get from the financial markets. To get a better handle on the importance of starting young, check out Exhibit 5.1. If you're aiming to amass $1 million by age 65, you would need to sock away a hefty $2,423 a month if you start saving at age 45. But if you begin at age 25, the required monthly sum drops by roughly three quarters, to just $653. These savings rates assume a steady 5 percent annual return, which might seem low, but we're also assuming zero inflation.

Table 5-1. Who Wants to Be a Millionaire?

The earlier you start saving, the easier it is to amass your desired sum. Here's ...