We talk about compounding often because it is so powerful.  I was reminded the other day by a friend of mine about the difference between saving and investing your money early in life as compared to later.

I have spent a lot time trying to make conversation about money with my kids.  It would often be a topic during my favorite part of the day, our nightly dinners with my family.  Those days are all but gone, at least the nightly part.  With 2 of 4 kids out of the house and everyone working, it is not often that we get to have those nightly dinners all together.

This is circa 2003, when my oldest was 11 and my youngest was 5.  Even at this age, they were saving 25% of whatever they earned (even if it meant socking away a quarter out of the dollar they earned for doing the dishes!).

When we did, I liked to talk about money so that my kids would be exposed to financial terms and know the difference between a stock, a mutual fund, an investment in a Self-Directed IRA, real estate, etc.  Why is one better than the other and when is that the case?  As you know, those are not simple answers, nor are they black and white answers.  Lots of gray.

However, one thing always stood out and that is the power of saving, reinvesting, and letting your money compound sooner rather than later.  No matter how you slice it, that answer has no gray to it since it is a mathematical formula.

I would encourage my kids to start saving and reinvesting as soon as possible and never let up – because it adds up!  Below is a comparison between two people who start saving at different points in their life.  The first person, let’s call her Sally, starts when she is 20 years old and saves $2,000 a year for 10 years until she is 30 years old for a total of $20,000.  The second person, let’s call him Jim, waits to start saving until he is 30 years old and saves $2,000 a year until he is 72 years old for a total of $86,000.  Both of them were good investors and made 10% every year on their money.

The difference in savings when they both reach 72 years old is staggering.  Sally contributed only $20,000, but by starting 10 years earlier, ended up with over $735,000 more in savings than her counterpart.  At 72 years old, she had $1,920,000 and he had $1,185,000.  Or you could say she ended up with 62% more than Jim did by starting 10 years earlier and saving $66,000 less.

What a great gift to give to your kids, your grandkids, and great grandkids: the knowledge of compounding and beginning as early as possible in life.

Sally’s Savings
– Started saving at 20 years old.
– Saved $2,000 a year for 10 years until she was 30 years old for a total of $20,000.
– Sally made 10% on her money every year.

Age Year End of Year Balance
20 2019 $2,000
21 2020 $4,200
22 2021 $6,620
23 2022 $9,282
24 2023 $12,210
25 2024 $15,431
26 2025 $18,974
27 2026 $22,872
28 2027 $27,159
29 2028 $31,875
30 2029 $35,062
71 2070 $1,745,585
72 2071 $1,920,143

 

Jim’s Savings
– Started saving at 30 years old.
– Saved $2,000 a year for 42 years until he was 72 years old for a total of $86,000.
– Jim made 10% on his money every year.

Age Year End of Year Balance
30 2019 $2,000
31 2020 $4,200
32 2021 $6,620
33 2022 $9,282
71 2060 $1,075,274
72 2061 $1,184,801