Wealth Habits – Saving Early

firefighterWhat’s the difference between $1 saved in our 20s and $10 earned in our 50s?

The answer blew my mind. Turns out it’s likely the same thing.

As a young person, it is tempting to tell yourself that you’ll save more when you’re in your “Peak Earning Years.”

The trouble with “save more later” is you might be living with 4 dependents (plus cats) and have a mortgage once you arrive at “tomorrow.”


What is the single greatest wealth behavior that you can teach your family?

Early savings and patience

  • I’m 46 and it has been 25 years since I graduated from university
  • In the first five years of my career, assume that I saved $17,500 per annum
  • How much would another graduate have to save from 46 to 60 years old to catch up?
  • Assume a rate of return of 7.5% per annum across all periods

The formula in Excel is called “FV” for future value. You need to know the rate of return on investment, the number of periods and the payment.

7.5% rate of return, across five years, with an investment of $17,500 per annum => gives $101,647 at my 26th birthday

The next step in our case study is to roll the $101,647 from my 26th birthday to my 60th birthday.

7.5% rate of return across thirty-five years with NO ADDITIONAL INVESTMENTS.

What do you think?

BOOM => $1,277,586 from $87,500 invested in the first five years out of university

Consider this example against the $1.2 trillion of US Student Loan debt.

I urge you to revisit these numbers when considering significant spending on private education as well as taking out loans. You are making wealth decisions with massive long term implications.

What it would take to catch up if another graduate waited until her peak earning years?

  • Future Value to achieve is $1,277,586
  • 15 years (46 to 60)
  • Rate of return is 7.5%

The function to calculate the answer is called PMT (payment) and the answer is $48,915 per annum. Across 15 years she must make a total investment of $733,725, versus $87,500 for the early saver.

In this example, $1.00 invested in the 1990s bought the equivalent of $8.38 invested 25-40 years later. This is despite terrorism, wars, civil unrest, recessions, frauds, unemployment, bankruptcies, disease, and all the other bad news that we’re constantly fed.

My wife and I have a joint life expectancy of 47 years.

My daughters have a joint life expectancy of 90 years.

Time is always on your family’s side.