Why Time is on Your Side with Saving and Investing | Stash Learn
How Time Can Help You When it Comes to Saving and Investing
By: Team Stash
Published: May 01, 2020
• Updated: Aug 22, 2024
The sooner you start investing, the more compounding can work for you.
In this article:
Part of your budget should always include saving. Maybe you can’t manage putting away 20% of your income, as some experts recommend. That’s okay. Putting away even a few dollars a week can really add up over time.
Strategies:
Examine your variable expenses each month. Do you really need a take-out coffee or sandwich every day? Over the course of a year, you can potentially save hundreds, or even thousands of dollars by packing your lunch or bringing coffee in a thermos.
Start by building an emergency fund. The general rule is to have at least three to six months of expenses. But setting aside even a few hundred dollars for unexpected costs is great. Consider putting this money in an account that’s considered safe, such as an FDIC-protected bank account.
Then think about investing money beyond your emergency fund, in an investing account. The average return for U.S. large cap investments for 2019 is estimated to be about 5.25%, according to some experts. And your money is likely to compound over time.
Example:
First, let’s explain compounding. Compounding is essentially a snowball effect involving the interest or earnings your money can make as it continues to earn more interest or some other return over time. For example, if you start with $100 and put $50 a month away for ten years, with an annual return of 5.25%. You’ll have slightly more than $7,800, but you’ll only have put away $6,100. Compounding could add about $1,700 to what you save.
Now let’s show you how time can work on your side. The sooner you start investing, the more money can work for you through the power of compounding. Notice the difference between how much someone can save by the time they’re 65 if they start at 25, versus starting at 35.
For both charts, we assume you start with $100 and put $50 away each month, with an annual return of 5.25%. The person who starts at 25 will save a total of $24,100 over the next 40 years, compared to the person who starts at 35, who will save $18,100.
But the person who starts at 25 will end up with nearly twice as much money, just for starting ten years earlier.
By starting early, the person who starts at 25 will save $24,100 by the time they’re 65. Compounding will add an additional $53,732, for a total of $77,832.
By starting later, the person who starts investing at 35 will save $18,100 by the time they’re 65. Compounding will add $23,981.88 for a total of $42,081.88.
As you can see, the person who starts ten years earlier winds up with nearly twice as much money, even though they only save $6,000 more dollars. The extra money that the person who invests for longer could wind up with is all thanks to the power of time and compounding.
What are you waiting for?
The sooner you get started saving and investing your money, the better. On Stash, you can start investing with any dollar amount.
With Auto-Invest, you can contribute to your investments on a regular schedule that works for you. By automating your investment strategy, you can maximize the power of compounding without having to remind yourself to invest regularly.