Everybody knows that the sooner you start investing and saving, the more money you will end up with. So why do people always put off saving money and investing? Part of the reason is because they do not realize what the opportunity cost is. If most people saw the difference by the numbers then they might be more inspired to start right away. Let’s take a look at a few different scenarios.
Scenario 1:
Mr. Smith graduates from college at age 22 and gets a well-paying job. He manages to save $1,000 a month for the next ten years. Every month he adds the $1,000 to his investment account and he consistently has a rate of return of 10%. By age 32 he has amassed about $210,450. At this point if he were to stop saving $1,000 a month and let the savings he already has compound until age 65, he would then have about $6.5 million at retirement. Mr. Smith has saved $12,000 a year for ten years which equates to a total capital of $120,000. The fact that he would have $6.5 million at age 65 is incredible.
Scenario 2:
Mr. Smith graduates from college at age 22 and gets a well-paying job. He neglects to save any money at all until he is age 32. When he turns 32 he decides to start saving $1,000 a month every month until he turns 65 with a return of 10% as in Scenario 1. Using this approach Mr. Smith would amass roughly $3.46 million dollars. Notice that although he saved $396,000 in capital which is more than 3x what he saved in Scenario 1, he ended up with less money because he lost ten years of compounding. In fact, those ten years cost him about $3 million dollars in future money. It is ironic that he saved MORE money and ended up with LESS money from investing all because of the ten year period of not saving. Compounding is that powerful.
Scenario 3:
Mr. Smith graduates from college at age 22 and gets a well-paying job. He manages to save $1,000 a month for the next ten years. Every month he adds the $1,000 to his investment account and he consistently has a rate of return of 10%. By age 32 he has amassed about $210,450. At this point Mr. Smith decides to continue saving $1,000 a month until age 65. Using this approach he would amass about $10 million by age 65. He would have saved $516,000 of his own money during this time. It is no surprise that he ends up with the most money in this scenario. Here he has maximized savings and compounding time which gives him the best of both worlds and the result is an extra $3.5 million from Scenario 1 and an extra $7 million from Scenario 2.
Scenario 4:
Mr. Smith graduates from college at age 22 and gets a well-paying job. He neglects to save any money at all until he is age 42. At age 42 he decides to start saving $1,000 a month every month until age 65 with a return of 10% as in the other scenarios. Using this approach Mr. Smith would accumulate about $1.15 million by age 65. He would have saved $276,000 of his own money and earned the rest from investment returns. This is the scenario in which Mr. Smith has the least amount of money by retirement, and it is no surprise because he delayed saving by 20 years. Compounding is by far the most powerful variable in these examples, and it highlights perfectly the opportunity cost of putting off saving money.
You can fiddle around with the numbers for yourself to create different scenarios to see the opportunity cost of delaying your savings. The main variables are when you start saving and investing, the rate of return, and the size of the monthly contributions. The golden years of saving are from age 20-40. If you can manage to save in your twenties that is terrific, but that is also considered to be the hardest time of one’s life to save money. Most young adults are trying to get their career and adult life started off on the right foot, and that can require a lot of money sometimes. However, saving in your thirties is essential if you desire a large retirement fund. Delaying your savings can cost you a lot more money than most people realize. It is hard to believe that the difference can be on the scale of millions of dollars, but the math doesn’t lie.
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