Today, I would like to share with you the magic of compounding.
Being wealthy, in my personal definition, is not about earning more, it’s about saving consistently. The simple fact is that people become wealthy by spending less than they earn. Yes, the more you have to save and invest, the faster your savings accumulates. But there are people here in Durango making $10 an hour with substantial savings accounts, and there are people here in Durango making $40 to $100 per hour with zero financial resources. Who are you? Who do you want to be 12 months from now?
Financial gurus recommend saving 25 percent of your income. No way, you say. Did you figure the 15 percent that is being taken off the top to pay Social Security? No, it isn’t available to you yet, but it is a form of savings. What would it take for you to begin stashing even 5 percent of your income. This is about the personal “time warp” account you make payments to every month to save for retirement.
Let’s say you and your friend Blaire are each 20 years old. You plan to comply with the recommended savings guideline of 10 percent, so you deposit or invest $100 on the fifth of every month for 10 years. At the end of that 10 years, the $100 a month has become $18,128. Then you stop saving. Your friend, Blaire, saves $100 monthly beginning at age 30. At 65, who has more in savings?
Surprise! At the end of 35 years, your forgotten $18,128 has compounded to a serious $268,028. Blaire, on the other hand, has faithfully put away $100 every month for 35 years and accumulated $215,635. How can that be? Youth is on the side of compound growth, For demonstration purposes, this is based on an overall 8 percent return in today’s dollars.
Here’s another twist. What if at 25 years of age you spend $5 to $7 daily on a fancy coffee or lunch five days a week? (We won’t even look at the weekend or alcohol purchases).
You make a pact with yourself to stop this spending and pay your “time warp” account $132 monthly instead of paying the coffeehouse or burger bar. This involves making your coffee before leaving home and bringing your lunch for 10 years. In that time, you will accumulate a substantial $24,310 rather painlessly. By age 65, that coffee/burger account will have ballooned to nearly $260,000.
Before you say that won’t touch that $1 million (and climbing) you hear you need to be able retire, I suggest answering these key questions: How much do you spend and how long do you expect to live? With that information you can calculate what you will truly need.
Start looking today at what you spend and, more importantly, what you can stash away. Let the magic of compounding begin working for you.
email@example.com or 382-6461. Wendy Rice is family and consumer science agent for the La Plata County Extension Office.