When Does $35,000 Equal $190,000?

Here is an illustration of the high cost of waiting to start a simple saving program.

Bob is 21 years old and he decides to begin saving for his retirement.  He starts putting $5000 each year into some type of  account, (a IRA, for example).  He does that for 7 years until he turns 28 and then he decides to quit and spend his money on other things.  He lets the money in his account sit and earn interest until he retires at age 65.

Fred, who is also 21 years old, decides that he will start saving later.  He spends all his money and doesn't have any left over to put in savings.  Then, when he turns 28, Fred decides he had better start putting money away for his retirement. He begins to put $5000 a year away just like Bob did, only Fred faithfully puts $5000 in every year starting at age 28 until he turns 65.

At age 65, which one has the most money? 

Remember they are both using the same type of savings program and they both realize the same rate of return.  Since Fred has put a total $190,000 in his account, compared to Bob's $35,000, it would be reasonable to assume that Fred will have more money. 

In truth Bob will have more money than Fred when they reach age 65.

Because Bob started earlier, his money has had more time to "compound", (doubling periods).  Using an example rate of 10%, Bob's $35,000 will grow to $1,944,326 by the time he is 65.  Meanwhile, Fred's $190,000 will have only grown to $1,820,217.  That is a difference of over $100,000 !

This simple illustration underscores the importance of time and consistency when saving money for future needs.

Disclaimer:  The above is for illustrative purposes only and is not representative of any specific type of investment, and is not a solicitation to conduct any type of business or investment transaction.