Natalie and Jessica want to save for their retirement.  Natalie began setting aside $100 a month when she was 23.  She continued doing so until she turned 31 and then stopped.  In nine years she invested $10,800.

Jessica didn’t start saving until she turned 31.  That year, she invested $100 a month and she plans to continue investing this amount each month until she turns 65.  By the time she reaches retirement age, Jessica will have invested $42,800.

Let’s assume they both earn an average annual return of 8% until age 65.  Both Natalie and Jessica will end up with approximately the same amount at retirement (about $230,000) but Jessica invested nearly four times as much of her own money!  It’s worth noting that if Natalie had continued investing $100 a month to age 65, she would have ended up with approximately $450,500.

No doubt you have heard some version of this fable before.  It was a staple at my bank when I was a financial advisor many years ago.  The story demonstrates an important lesson in building wealth – the sooner you begin investing, the more you will accumulate.

If this is an example of the magic of compounding, why don’t more people do it?  I think it’s because they don’t really believe it.  After all, it takes a while to build up a decent balance and then there comes the shoe sale, or a great deal on a trip to Belize.  The money’s there (not doing much) and you can always start saving again.

What’s Your Excuse?

I don’t have any money to save.  My debts are too high.  I need every penny I earn to live.  I’ll start when I get that raise, promotion, or new job.  It’s better to start with a small amount than nothing at all.  It gets you in the habit of saving.

When my first child was born I received Family Allowance of $16 a month.  I probably could have used the money, but I decided to save it for some vague future purpose.  Sure, the kids were well into their school years before it looked like anything substantial, but they ended up with not a bad nest egg when I finally allowed them to have it.  The idea is to be consistent.  Pay yourself first every month.

Another way to start small is by enrolling in your employers’ Employee Savings Plan or Group RRSP if available.  A small deduction off your pay cheque will accumulate very nicely over time.  If your employer matches some, or all, of your contribution, so much the better.  I’m surprised that not everyone with this opportunity takes advantage of it.

I don’t know what to invest in.  It’s unfortunate that learning to invest is not standardized in school.  That’s not an excuse though.  There are a lot of beginner finance books available that are understandable and easy to read that will explain the basics.  Some of them, The Wealthy Barber, Findependence Day and Millionaire Teacher, have been reviewed in this blog and there are many others.

In the meantime, it doesn’t take a genius to start putting money aside in a savings account.  Once you’ve learned the basics and are ready to make some investing decisions, you can consult with a financial advisor or, if you’re confident, strike out on your own.

It’s so boring, I can’t do it myself.  I do recommend learning the basics, but if you just can’t face buying and managing your investments on your own there’s lots of help available.  You can start by speaking to an advisor at your bank, or ask your friends and relatives for referrals.  You need someone you’re comfortable with and not be intimidated so you’re afraid to ask questions.  If more people questioned their advisors instead of just nodding and signing next to the “X” maybe financial professionals would become more accountable.

I don’t want to lose all my money if the stock market crashes.  You need to know your own comfort level.  Those investors who were shocked the last time the market fell didn’t properly understand the risks.  You don’t want to be worrying about your money, you want to watch it grow.

I found that the more information and knowledge a person has the more comfortable they would be taking on additional risk.  It all depends on you.  My father only purchased Canada Savings Bonds every year and was able to pay cash for his two houses.

Starting early and being consistent really does add up over the long term.

If everyone started saving a portion of their earnings right from their very first job (whether at 12 or 20) there probably wouldn’t be any need for our money sucking social programs except for the very needy and disadvantaged.  Our taxes would be used for life enhancing programs that could keep us in a standard that would be very easy to get used to.

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