What Difference Does A Decade Make?

In “7 Costly Retirement Savings Mistakes to Avoid,” I had mentioned that waiting too long is the number one mistake. I am afraid I didn’t demonstrate it well, so here is a different look at the concept.

Assume that in each scenario, the investment grows at 10% per year (Based on historical data, investment gain averaging 10% per year is feasible).

  • Investor A started saving and investing $4,000 per year when he was 25 years old. By the time he was 35 years old, he had already saved $82,000. When he is ready to retire at the age of 65, he will have accumulated $2.1 millions dollars.
  • Investor B didn’t start early. When he saw that investor A had accumulated $82,000, he wanted the same for himself. At the age of 35, he started savings and investing $4,000 per year just like his friend. When he turns 65 years old, he will only have $800,000. In essence, a decade cost him over $1.3 million dollars.
  • Investor C also wants in after he witnessed his friend success, but he wants to have as much as investor A when he retires. To catch up, he has to invest $10,700 per year just to keep up. In short, a decade cost him $6,700 per year.

Here’s the same scenarios in graphical format:

Decade difference

Now, do you believe time is money?

More about starting early:

About the Author

By , on Dec 4, 2007
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (16 Comments)

  1. Jaque says:

    I have to say to Kev that i consider situation number 3 – not to start – as being very very bad. I know for sure that there are people that don’t ever start saving money. I agree with Pinyo, that we have to teach our children how to appreciate their possessions and i also agree with Elisabeth’s thoughts that the children have to learn not only to appreciate the number of the objects but he have to know very many things about the quality of the products that he uses every day.

  2. Jonathan says:

    It just goes to show that starting early is key. I think that $4,000 is a good starting investment for anybody to work towards.

  3. Pinyo says:

    @Elizabeth – I really like that idea about making things more durable and meaningful. Try to steer the kid away from disposable mindset.

    @Minimum Wage – I am sorry, but you just have to snap out of it. Let me tell you about my mum. She can barely speaks English and used to work in a sweatshop not too long ago — working 50-60 hours for minimal pay, no overtime, no benefits, etc. She made some changes, tried, and now she’s the head tailor for a premiere fashion designer. She also went from earning to least, to earning the most in the family.

    There’s a sweet spot for you somewhere out there; you just have to find it. I know people who would kill to have your mastery of the English language and communication skill.

  4. Minimum Wage says:

    I have no marketable skills and no career-related experience, and I am well into middle age. My resume is pretty useless and even I can’t see anything in it that might positively interest an employer. I can’t get financial aid, so going to get a skill isn’t an option (and at my age probably wouldn’t help). I am overweight and have bad teeth, and no money to fix them. There is no promotion path where I work, and since I have bad credit I cannot fix on my minimum wage income, getting a better job is a problem even without my other problems.

  5. Pinyo says:

    @kev – that’s a good way to look at it 🙂

    @Minimum Wage – I am sure not many. What’s stopping you from earning more than minimum wage? If I am earning minimum wage, you bet I will be fixing that first.

    @Elizabeth – Yeah, I was joking around. I really admire parents who can teach their kids to be frugal and responsible at such young ages. I can only hope to be able to do that with my own son. One of the thing I am planning to do early is not giving him too many toys and stuff. It will be a tough balance between encouraging him to learn and helping him to appreciate his possessions.

  6. Elizabeth says:

    Pinyo,
    I applaud your plan to keep the number of toys under control. I think that’s a key means of teaching our children core frugality values. Another important concept, for me, was to forgo all cheap plastic toys. I feel strongly that children should have well-made, open-ended toys. Cheap plastic toys break — no matter how careful children are. If you provide sturdier, well-made toys, children will not grow up assuming that things will break and expecting to have broken toys replaced. These are great examples of how parents can teach valueable financial lessons early on. Indirect lessons can be more memorable and have a longer lasting impact that direct lectures and lessons.

  7. Minimum Wage says:

    True, but realistically, how many people living on minimum wage do you think are going to be able to invest $4,000 a year, even if they try hard?

  8. Elizabeth says:

    Pinyo,
    I didn’t keep the compounding credit interest illustration. But it’s a topic I want to bring up again soon; I’ll be sure to keep it to share on my blog. My kids are 13 and 15. Both are extremely responsible with their funds (cash and gift cards) and both have timed savings accounts in which they continue to watch their savings grow. The 15-yo also has a checking account that she handles very responsibly. I have strong opinions about how to teach kids about money; I’ll keep sharing them on my blog. One of the keys, imho, is to give them a strong taste for saving before they ever get a chance to spend. I know you were joking, but I feel strongly that teaching early is not always the best way to go. Teach smart instead.

  9. kev says:

    That chart sums it up quite well.

    Starting early = good

    Starting late = bad

  10. Pinyo says:

    @Mrs. Micah – I didn’t know Obi-Wan got married, and to you no less. Anyway, I know you guys are fairly young, so congratulation on the early started. I think I started when I was 22/23 and I am glad I did — back then IRA contribution limit was only $2,000 per year.

    @Minimum Wage – Not everyone, especially if they don’t try…unfortunately.

    @Elizabeth – Hey, that’s a familiar looking blog. I’ll bet you scared their pants off with that illustration. If you have it up on your blog, please share. I’d love to see it. How old are your kids by the way? My wife is about to give birth and I am wondering when I should start. May be I can start him on a diaper allowance. 🙂

    @Madison – 16! Wow, you did great. I’ll bet you have a nice amount saved by now…12 years later.

    @ChristianPF – My pleasure to link to a great post. We should teach personal finance in school. I think it’s even late to teach them after college. I think we should catch them while they are in high school.

    @RocketC – Sorry. I know it’s graphic. I should put an NC-17 warning up top.

  11. rocketc says:

    I find these types of graphs to be depressing. . . but I passionately want to shake every 20-something I know and tell them to get on the ball.

  12. ChristianPF says:

    It is so important to start early!! Way to go Madison – that is impressive!! Pinyo, thanks for the link – It looks like a lot of people are talking about it recently

  13. Minimum Wage says:

    That’s nice, but who has $4,000 per year to invest?

  14. Madison says:

    Great graph! Starting early was the best financial move I ever made. I started my retirement account at age 16. We wouldn’t need to contribute any more 12 years later if we didn’t want to.

    @Mrs Micah Vanguard has one fund that you can open with $1,000. The STAR fund. Not my favorite, but I think it’s the only one with a low minimum. You could then move it later when it hits $3,000.

  15. Elizabeth says:

    Great illustration! I did the “compounded interest on credit cards” illustration with my kids the other night at dinner. They both have savings accounts so they see compounded interest at work there. I think we’ll look at your investment illustration later this week. I know it will make an impression.

  16. Mrs. Micah says:

    I believe, Obi-Wan. And I should be opening a partially funded ($1000) Roth with ING this week. Not the best option, but I don’t have the money for some of the better ones…so I’ll start here and move to Vanguard (which I like) when I have enough in it.

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