There's No Time Like Now to Make Your Coins Work for You

I am waxing nostaligic as I mark the start of my third year as a personal finance blogger. In celebration, let's talk about one of my favorites subjects: How to make a lot more money (I'm talking millions) for your retirement. It's a simple formula - I promise! Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Three Years Young!

Personal finance blogs are not in short supply, but they often have different objectives. In launching this particular blog three years ago on June 24, 2019, (what a different world it was then), I wanted to keep it relatively narrow in scope – convincing young adults to develop a plan to save money early and often.

I soon expanded that scope to include all ages of adults, but the goal remains the same: Start saving and investing as early as possible, exercise patience (and live a long time).

Three Key Ingredients

The internet is packed with information and tools regarding financial planning. Despite this abundance of advice, countless studies indicate that minimal progress has been made convincing young people to save early and often – important keys to financial planning.

The basic challenge most young adults face is developing a savings habit – simply getting started. Granted, most of us finally do start saving (and investing), but usually after wasting that most important asset in life’s financial arsenal: TIME. Young folks can certainly produce a list of good and valid reasons (let’s call ‘em what they are, excuses) not to save. But let’s not dwell on the excuses. Rather, let’s discuss the most basic ingredients of saving for “long-term” investment: Time, Money and Discipline.

• Time: Based on the law of averages, most folks have 70…80…90 years of time on this earth to mature into responsible, functioning individuals (20-25 years of that time could be spent in retirement).

• Money: Unless they have carefully chosen their parents, most kids start out with zero dollars.

• Discipline: A learned experience, which seems to come and go depending on the swirl of circumstances life’s challenges present.

The Time is Now

As it relates to personal finance, the importance of time is to understand that “now” time is much more valuable to an individual than “later” time. And why is that? Simple. If you apply an interest rate – say 5% – to “now” time savings, it has more years to grow and multiply than if the same rate of interest is applied to “later” time savings.

The gap between “now” and “later” time is filled with many things, but when it has to do with investing, it’s often called “putting off until later what you should be doing now”…saving. And it’s an inglorious waste of what I call The Amazing Power of Compounding, which converts a few dollars into many dollars, given the time to do so. Even after you retire, compounding doesn’t quit working for you. It just keeps adding to your wealth.

To help explain the Amazing Power of Compounding, a function of time, let’s pose a simple (and hypothetical) example:

A 21-year-old starts saving $100 per month, compounded annually at 5%, until age 65. How much will that person accumulate during those intervening years?

The answer is $186,250 ($52,800 in contributions and $133,450 in interest).

What if that same individual waited until age 43, but saved $200 per month, compounded annually at 5%, until age 65?

The answer is $94,900 ($52,800 in contributions and $42,100 in interest).

Please note that the individual contributed the same amount of money…$52,800…in each instance but earned $91,350 less in interest due to the time factor. In short, the value of starting to save early in life is remarkably apparent.

Money Troubles

In their early 20s, just beyond high school or college, most unskilled or inexperienced workers haven’t had time to accumulate much money. Unfortunately, many of these youngsters were raised by parents guilty of making the same excuses they do. They are parents who, like their progeny, went to college on borrowed money, did their share of partying, lingered on campus a couple of semesters longer than necessary (by the way, it is permissible to enroll in more than 12 credit hours per semester), worked some – but not much – during summer and semester breaks, and finally graduated, too often burdened with a rather hefty student loan debt. Hey, I’m not being critical here…just stating the facts.

And, there’s more than just student debt. There’s also credit card debt, car notes, mortgage debt, and personal debt of one sort or another that must be dealt with. Speaking of debt, reduce it to the extent possible, starting with the costliest debt first (i.e., credit card debt). Better yet, if at all possible, avoid debt altogether!

How Not To Save

Unfortunately, because credit is so readily available, it’s easy to load up on debt in today’s world. For this and a myriad of other reasons, most young adults save very little by age 30. Many don’t save one thin dime. A common reason is that many 20-somethings believe that learning about personal finance is difficult. Part of the problem is that about half of our states avoid teaching the subject in secondary schools. Hard to believe but true. At what point in life would personal finance be more appropriately taught?

Another reason is the spidery financial industry (Wazoos, I call ‘em) hard at work spinning their webs that dealing with personal finances is so complex it requires the help of experts. Well, that ain’t necessarily so. Keep a suspicious eye on the Wazoos. They’re experts at using fine print and acronyms. They develop complex schemes – not to enlighten us - but to convince us to let them manage our money…to make them money.

Time & Money Together

But all is not lost. It helps that the youngest among us are those most blessed with time. But when time and money factors are mentioned, up bubbles the oft-used excuse, “I just don’t have the time to spend on budgeting or screwing with my personal finances.” Hogwash! Although most young people do lead busy lives, 19-25% of waking hours are spent watching television in addtion to shopping, pursuing hobbies, or with eyes glued to that third appendage, the iPhone.

The young adults among us have 40 or so years to make up for lost time, but time is of the essence. And those early years of time not spent saving can never be reclaimed when talking about The Amazing Power Of Compounding. Many young adults work for employers that offer matching contributions (FREE MONEY) to employee 401(k) or 403(b) savings plans. And those who don’t work for such employers can set up their own IRAs (Traditional or Roth). Question is, how many young adults take advantage of these various tax-affected savings plans now instead of later?

Missed Opportunities

This brings up the most troublesome of habits – deferring financial opportunities until tomorrow…or later. Or as I like to say, “It’s Never Too Late, but Early is Better.” It seems so obvious that the longer we wait to save, to invest and to pay down debt, the more we miss those fleeting opportunities for investment gains.

The most egregious missed opportunity of all is to NOT participate in an available 401(k) or 403(b). Or, even when we do participate, to fail to take full advantage of the aforementioned EMPLOYER’S MATCH. Talk about burning FREE MONEY. Losing the benefit of compounding FREE MONEY borders on the unforgivable. Remember, young adults, time slips away, and suddenly you’re – gasp – 30!!!

Discipline Matters

Let’s talk about how discipline plays into investment strategy. This example might help.

Let’s assume that the average person – college educated or not – starts making enough money at age 20 to save a few bucks if he or she so chooses. She’s a smoker, so she decides to do her wallet and health a favor by ditching a two-pack-a-day cigarette habit (the most egregious of the many Million-Dollar Habits).

A pack of 20 cigarettes cost about $6.36/pack (U.S. national average). Based on this, our ex-smoker now has $12.72/day or roughly $382/month to invest. She decides to invest this windfall in a Vanguard Total Stock Market Index Fund (VTSAX), which, since inception, has yielded roughly 8.22% per annum (no guarantees, the past is not prologue). Our saver now routinely deposits the $382 into a Roth IRA and invests it in the VTSAX. After investing $382 of after-tax money each month in a Roth, compounded annually at 8.22%, by age 30, her Roth is worth $70,100; by age 40, $224,400; and by age 65, $1,978,400!

Did I just hear thousands of packs of cigarettes being tossed to the wind? Compare these numbers to those mentioned in a Federal Reserve SCF study, which noted that median retirement savings for Americans ages 65-69 is about $207,000, a far cry from $1,978,400. That frighteningly small number might belong to those former 20-somethings who decided to keep smoking or who simply chose not to start saving in their early 20s. Yep, that $207,000 could have been almost $2 million. Who knows, maybe in their 30s, this group finally joined the savers, but even then, it would prove to be a costly mistake in terms of future investment earnings.

And by the way, the index fund investment mentioned in my example above is not gambling. More correctly defined, it is “calculated risk-taking” by investors over time who employ dollar-cost averaging in a highly diversified portfolio and who dare to be average (the best you’ll do with an index fund is earn what the broad market earns).

In Sum

Young or old, folks must first become savers in order to make money as investors. You need to develop a good investment strategy and stick with it over the long-term – a strategy that offsets natural gambling proclivities; avoids a tendency to roll the dice on a single “sure winner;” defies desires to play the Powerball lottery (with those wonderful odds of multiple millions to one); and so on.

And please remember, a stock market chart looks like a jagged sawtooth in the short-term – up and down, up and down – but smooths out considerably over the long haul – in a decidedly upward direction.