Want to be a millionaire? Start saving
After almost 30 years spent working in the financial services industry, I've seen a lot of investment fads come and go. The media gets excited about new ideas and strategies that never seem to stand the test of time.
During my career, I'm sometimes asked what the secret to investment success is. The truth is that there are a lot of secrets, because investing is complex. But when all's said and done, if I could give just one piece of financial advice it would be to start saving and investing early. That's because of two of the most powerful words in the financial world: compound interest.
Power of compound interest
Compound interest is a powerful concept and sometimes counterintuitive. It means that not only does an investor earn interest on their principal, but on the interest they've already earned as well, so they are earning interest on interest.
For example, if you have $100 earning 10 percent compound interest, you will earn $10 the first year. The second year, you won't earn only $10, but rather $11 because you are earning interest on your initial $100 plus the $10 you earned in interest the first year. The third year you will earn $12.10 and the fourth $13.31. With compound interest, money builds exponentially.
Saving small amounts over long periods of time is incredibly powerful due to compound interest. The
combination of time and compound interest make it possible for almost anyone to retire a millionaire if they start early enough. If you were to begin investing at age 25 with $300 a month earning an 8 percent rate of return, you would be a millionaire by age 65. You would end up with over $1 million having only contributed $144,000. That is incredible growth!
If you waited until age 35 to begin saving, you would need to contribute $685 a month to reach millionaire status at age 65, more than twice what you needed just 10 years earlier. Waiting to begin until age 45 means you would need to contribute $1,700 a month to get the same result that $300 a month could have gotten you had you begun 20 years earlier. By the time you're 45 that $300 a month will only build you a nest egg of $177,922.53 by the time you are 65. A 20-year delay can cost you over $800,000!
Making saving a priority
If compound interest is so powerful, why don't more young people take advantage of it? First of all, retirement planning is rarely one of the foremost things on a 20-something's mind. When you are young, you feel as if you have your whole life ahead of you and there is plenty of time in the future to think of such things. But saving enough is much easier if you start early.
Most young people feel more pressure to spend money having fun and keeping up with their friends than they do to save for the future. Yet this can be a costly mistake. It can be difficult to forego what is "normal" in order to invest for the distant future.
Though it may not seem important at the time, limiting spending in order to save and invest early in life is one of the most important things anyone can do. Do you have children or grandchildren that you'd like to introduce to saving? Do your best to encourage them!
Tom Breiter, president of Breiter Capital Management Inc., a registered investment adviser, can be reached at 941-778-1900 or by e-mail at: tom@breitercapital.com
This story was originally published May 2, 2016 at 10:56 PM with the headline "Want to be a millionaire? Start saving ."