Do the Heavy Lifting Now, While It Isn't So Heavy

One of the most common reasons people often give for not saving and investing at a young age is "I just don't have enough money now to save."

It's a valid concern.

Life is expensive. It just is. It's also likely to get more expensive for most people. Whether it's getting married, having children, paying for school, rising inflation or the expectation for retirement, as time goes on, more and more of your income will be going out the door in expenses. Rarely does someone's life get less expensive as time goes on.

However, while not having enough money to invest at an early age is certainly a valid concern, I believe that most focus on the negatives, while really missing the biggest advantage there is in finances: the power of compounding interest.

Albert Einstein even called compounding interest "the greatest mathematical discovery of all time."

The earlier you start investing and saving, the better. However, even better than that is the realization that you don't need to save as much money at an early age to propel you on a trajectory to reach your financial goals.

Let me illustrate:

Assume there are two brothers that are ten years apart. Alex is 26, just starting his career, not making a ton of money, maybe $50,000 dollars. His brother, Brandon, is 36, more established in his career, making $120K/year, with a family and two kids. Both have the goal of reaching $1,000,000 for their retirement nest egg at age 60, but neither have done saved and invested anything towards that nest egg yet. The also know that historically the S&P 500 has returned approximately 10% annually and are planning on buying a low-cost S&P 500 index fund to house their saved dollars.

Who's in the better position?

Now while the title of my post might indicate who I think is in the better position, let me show you why I believe Alex is in the better position. Obviously, Alex has less income, and therefore its certainly harder to save large sums of money. However, to reach his goal of $1,000,000 at age 60, he only needs to save $3689 every year from 26 to 60. This works out to 7.4% of his $50,000 annual income.

Brandon on the other hand needs to save $10,168 every year from now until he's 60 to reach the same $1,000,000 goal. This works out to 8.5% of his annual income.

Now you may say that given Brandon's increased income, that additional 1% isn't a big deal. However, by the time Alex gets to age 36 (same as Brandon is today), he still would only need to save $3689 a year. If Alex followed a similar career path as Brandon, and at age 36, he was making $120,000/year, that savings rate would only be 3% of his annual income. This would be a huge advantage to Alex, as it makes saving easier as time goes on (especially considering the increased expenses as time goes on), but it also allows Alex to more easily adjust his goals upwards.

Below is a chart of the annual savings amounts it would take someone to save a constant rate between their current age and 60 years old.

A common rebuttal to this argument is that most people's peak earnings years happen in their 40s and 50s. This is certainly true. Many Americans rapidly increase their savings in these peak earning years to play catch-up, but it is certainly not easy. Most adults in their 40s and 50s are considering the costs of private education, college, weddings, travel to see kids and grandkids, and many other expensive considerations. While they certainly have more money, their are also great demands on their income that life throws their way.

My encouragement to you is why not do the heavy lifting now, while it isn't quite so heavy!

Blessings