Time is Money!

I am often asked, "When is the best time to start financial planning?" In my opinion, there are two best times to start. The first is when you get your first job. If you can learn to live without 10% of your income starting day one, you will be able to save lots of money and watch it grow.

The second best time to start financial planning is right now. If you missed the first best time, and unfortunately most people to, starting today is better than tomorrow. The more time you have between today and the day of your retirement, the more your money can grow.

People who start saving early have a distinct advantage - compound interest. Earning interest on your interest can have a tremendous impact on your growth rate.

Here is an example with two people, Tom and John. Tom starts saving early, putting away $2,000 a year for 10 years starting at age 21. Then he lets the money continue to grow until 65. John wants to wait. He starts at age 31 putting away $2,000 and continues doing so until age 65. They both invest in the same hypothetical investment that earns 8%. Tom's total contribution is $20,000, Johns is $70,000. Who ends up with the most money?

Age	Tom Contribution	Tom's Total	John Contribution	John's Total
21	$2,000	$2,000	$0	$0
22	$2,000	$4,160	$0	$0
23	$2,000	$6,493	$0	$0
24	$2,000	$9,012	$0	$0
25	$2,000	$11,733	$0	$0
26	$2,000	$14,672	$0	$0
27	$2,000	$17,846	$0	$0
28	$2,000	$21,273	$0	$0
29	$2,000	$24,975	$0	$0
30	$2,000	$28,973	$0	$0
31	$0	$31,291	$2,000	$2,000
32	$0	$33,794	$2,000	$4,160
33	$0	$36,498	$2,000	$6,493
34	$0	$39,418	$2,000	$9,012
35	$0	$42,571	$2,000	$11,733
36	$0	$45,977	$2,000	$14,672
37	$0	$49,655	$2,000	$17,846
38	$0	$53,627	$2,000	$21,273
39	$0	$57,917	$2,000	$24,975
40	$0	$62,551	$2,000	$28,973
41	$0	$67,555	$2,000	$33,291
42	$0	$72,959	$2,000	$37,954
43	$0	$78,796	$2,000	$42,991
44	$0	$85,100	$2,000	$48,430
45	$0	$91,908	$2,000	$54,304
46	$0	$99,260	$2,000	$60,649
47	$0	$107,201	$2,000	$67,500
48	$0	$115,777	$2,000	$74,900
49	$0	$125,039	$2,000	$82,893
50	$0	$135,042	$2,000	$91,524
51	$0	$145,846	$2,000	$100,846
52	$0	$157,514	$2,000	$110,914
53	$0	$170,115	$2,000	$121,787
54	$0	$183,724	$2,000	$133,530
55	$0	$198,422	$2,000	$146,212
56	$0	$214,295	$2,000	$159,909
57	$0	$231,439	$2,000	$174,702
58	$0	$249,954	$2,000	$190,678
59	$0	$269,951	$2,000	$207,932
60	$0	$291,547	$2,000	$226,566
61	$0	$314,870	$2,000	$246,692
62	$0	$340,060	$2,000	$268,427
63	$0	$367,265	$2,000	$291,901
64	$0	$396,646	$2,000	$317,253
65	$0	$428,378	$2,000	$344,634

It is amazing that Tom contributed $50,000 less, but came out with $83,744 more at the end. He just started 10 years earlier. Albert Einstein put it best when he said “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

When you chart the value of an account growing with compound interest, it always starts out rather flat in the early years. At time goes on, it starts growing at a steeper and steeper rate. Check out this chart:

This chart shows what would happen if somebody saved $2,000 a year starting at age 21 and the account grew at 8%. As you can see towards the end of the graph, the difference between the years is growing significantly. There is a difference of about $63,800 in the last year alone! Thank you compound interest!

Compound interest doesn't care how rich or how poor you are. It works the same for everybody. The growth rate on this graph would be the same for annual contributions of $200, $2,000, or $20,000. Obviously numbers on the left side of the graph would change, but the slope would remain the same.

Unfortunately, compound interest discriminates on age. Everybody starts at the same place - the left - on this graph. It doesn't matter if you are 21, 45, or 70, you always start at the left where the money isn't growing quickly. The younger you are when you start, the farther you will go to the right. If you start at age 45, you would have to save to age 90 to get to the same end point on this graph.

Compound interest can work against you. You may think, "How can that be, Mike? You just said it was really great!" It works against you when you are borrowing money, especially on credit cards. If you bought a $2,000 TV on a credit card charging 15% interest over 2 years, you would end up paying a total of $2,327.28 for it. Oops.

Is time really equal to money? In this case it is. The earlier you start saving money, the more it can grow. If you are a parent, this is one of the most important financial lessons you can your child.

Are you wondering if you can really afford to save money? I ask, "How can you not?" I like to have people go through a cash flow analysis to look for money they can reallocate to savings. You can access our cash flow analysis form by clicking here.