The Best Time To Start Saving Is Now

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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  1. Frugal Fries on March 15, 2012 at 5:06 am

    This is fantastic advice Boomer. I appreciate the anecdote, because a similar story is what inspired me to start saving, despite my current debts and expenses.

    Still, I know this mentality can really hold people back. The truth of the matter is, you don’t need to be wealthy to save for retirement–anyone can do it, and it shouldn’t put you into the red.

    I think frugal living really comes into play here, especially for people worried about making ends me.

    • Boomer on March 15, 2012 at 1:54 pm

      @Frugal Fries: A lot of people think you should pay off all your debts first before you start saving. Personally I think that seeing a savings balance grow – even with small deposits – brings about a measure of satisfaction. There’s no reason why you can’t get into the habit of saving while still reducing your debts as fast as possible.

  2. Alison on March 15, 2012 at 7:34 am

    What has me stumped is how compounding interest would work on a mutual fund. If funds fluctuate based on the unit cost and you don’t really have the money unless you sell units, then you could buy units today at $10 each and when you’re ready to retire, they could be $10 each again… and then what? Perhaps compounding doesn’t work on mutual funds.

    I’m reading the Wealthy Barber Returns right now and in the chapter where he talks about compounding interest he compares someone who earns 4% vs. someone earning 8% and how much more the person with 8% would end up with as a result of compounding interest. Can someone offer some examples of investments that would earn 8% a year and where you are guaranteed to keep that interest?

    • Boomer on March 15, 2012 at 2:10 pm

      @Alison: The investments within mutual funds earn interest, dividends and/or capital gains which are distributed to you as additional units (or partial). So, yes, you could end up with the same unit price, but you would have more units and therefore a larger value. Take a look at the post on Index vs Growth mutual funds to see how they have increased over 10 years.
      In my opinion you won’t find any legitimate investments that will guarantee an 8% return. Historical returns (depending on the source) of Bonds – 5%, S&P/TSX Composite Index stocks – 10% and US small cap stocks – 13% are based on the average return over a number of years and several economic cycles – so again, it’s based on time.
      Also keep in mind that the higher rate of return, the greater the risk, so stay within your comfort zone.
      The strategy is simple – know your objectives, make a plan, deposit regularly, take advantage of dollar cost averaging and DRIPS and (most important) stay invested. Adjust your plan if and when necessary. A lot of people don’t get good rates of return because they get scared and bail out too soon.

  3. krantcents on March 15, 2012 at 8:33 am

    Saving is the one habit that helped achieve so much financially in life. My wife and I started individually before we were even married. By the time we married, we had $6K to gether. It helped us get our first house at 27 years old.

    • Boomer on March 15, 2012 at 2:13 pm

      @krancents: When my husband and I got married we chose to pay all our expenses with his salary and save mine. This is how we saved the down payment of our first house when we were 22 & 24 respectively. Interestingly, we were the first couple – and for a long time the only couple – to own a house among all our peers.

  4. Marianne on March 15, 2012 at 12:36 pm

    The idea of compounding always makes me go crazy about saving as much as I can possibly save RIGHT THIS MINUTE! It’s hard though because in some cases the person who saved every penny from the age of 20-30 wins and sometimes the person who threw every last cent they had into start up costs for their own business in their 20s ends up way ahead of the saver. Or not. Everything’s a gamble I guess…

    • Boomer on March 15, 2012 at 2:19 pm

      @Marianne: The nice thing about getting into a savings habit is you have choices later on. If that choice is to have your own business then you have a good starting base. Businesses are also investments, with the risks and growth potential of some stock portfolios.

  5. mycanuckbuck on March 15, 2012 at 7:51 pm

    This is good advice. I’ve been investing since I was 23, but I still don’t think I have what I ought to have sigh. And the other thing is – invest wisely! My now husband had a none too bright financial adviser who put him in a labour fund. And that’s all. So -that ended up being all the money he saved at an early age down the drain..

  6. My University Money on March 15, 2012 at 9:10 pm

    I love these examples! Einstein was totally right when he said, “compound interest is the most powerful force in the universe.” I completely agree with you as well on the whole idea of us saving for our retirement. I recently read that the Chinese have a 35% savings rate. This is an interesting cultural comparison to me. This whole commenting thing is so much more fun when I agree 100% with you!

    • Boomer on March 16, 2012 at 10:20 am

      @MUM: There’s a cultural difference indeed. Only look at the early morning line-ups today outside the Apple stores to be the first to get the new iPad3. An interesting quote from a purchaser. “I don’t think it’s worth the price but I guess I’m a victim of society.”
      (I must be losing my touch if we start agreeing with each other 🙂

  7. SE Book on March 16, 2012 at 10:01 am

    You couldn’t be more correct. I had to recreate a new way I went about spending recently. I wanted to save more and needed to find ways to cut back in order to save. I found by doing very little I could save a ton of money.

  8. Julie @ Freedom 48 on March 16, 2012 at 8:52 pm

    So true. We need to start saving and investing early. Start off with a small amount and you can painlessly increase the contributions as your salary grows etc. Just get the ball rolling!

  9. Irwin on March 18, 2012 at 4:53 pm

    Question: What is the Canadian equivalent of Treasury Inflation Protected Securities (TIPS)?

    Thanks in advance.

    • Boomer on March 26, 2012 at 11:50 am

      @Irwin: TIPS are securities that are backed by the US government and are indexed to inflation. The par value increases with inflation. A Canadian equivalent would be a real return bond. These can be purchased individually or though mutual funds.

  10. SE Book on March 23, 2012 at 10:37 am

    you could not be more correct.

  11. christy on March 24, 2012 at 1:51 am

    I really hate this fable. I was told this when in my mid-twenties when I had the first of two lump sums. I did what I was supposed to… and then there was a crash… the next time I did the same thing, and guess what there was a crash. In fifteen years I have just now managed to recoup my capital. That’s it. Nothing more to show for it. This fable sucks when applied to the last fifteen years. Yes, of course I understand timing and leveraging and MER etc etc blahdiblah. Doesn’t matter, this story didn’t work for me whatsoever. I just want to scream whenever some smug financial person tells me “magic of compound” and then looks at me like I’m an idiot for not having taken advantage of that.

    • Boomer on March 26, 2012 at 11:45 am

      @christy: I’m sorry to hear about your bad investing experience. I have these questions for you.
      1. Did you use your lump sums to purchase mutual funds at their (almost) highest price?
      2. Did you make regular additional purchases to take advantage of dollar cost averaging to smooth out the prices?
      3. Did you withdraw all you holdings when the market crashed only to buy back in when it was in recovery?
      The points of the story are to start saving early, make regular deposits and (most important) give it time. It does work.

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