The most important component of a wealth building project? Time! Let me illustrate with the following retirement-planning example:
- If you invest $1500 when you are 15 and never put another dime into it.
- If you invest $1500 per year starting at age 50.
Assuming a retirement age of 65 and an annualized return of 8% (I'm being conservative here as the annualized return for the S&P 500 from 1871-2014 was 9.11% unadjusted for inflation), who do you think will end up with more money by retirement?
- The 15 year old who goes through his/her entire working life without saving another penny will end up with $70,352.
- The 50 year old who puts away $1500 each year for 15 years will end up with $48,745.
Such is the power of the Time Value of Money (TVM). Whether you're saving for college, a car, retirement or anything else, the most important factor is starting early. (Barring windfalls such as winning the lottery of course). I hope this post gets you thinking about saving if you haven't already started and wets your appetite for my next post: "ROTH IRA - the Cadillac of Retirement Vehicles."