Time Can Be Your Enemy or Your Friend

Like in a sand timer, a few small things add up to something big if enough time has passed. This is a great metaphor for compounding interest.
Image source: www.videoblocks.com

In the 1973 classic Time, Pink Floyd member David Gilmour eloquently states how time can slip away, working against us if we aren’t careful:

You are young and life is long and there is time to kill today

And then one day you find ten years have got behind you

No one told you when to run, you missed the starting gun

These lyrics sum up an interesting point about life and how we move through it. As humans, we tend to focus on the immediate, and find thinking too far ahead difficult. The consequences of this are that by the time we get into a “distant” future, we take look around and have no idea how we got there. My hope is that after reading this article, you may feel empowered to not end up ten years older, trying to get your bearings and feeling broke, but rather happy that you took the time to be a diligent saver.

Three Lives, Three Different Choices

Let’s imagine three friends – Chris, Susan and Bill – graduate from college. They each enter into their respective career fields, fully employed. Their incomes are the same. Their decisions are drastically different.

Out of the three of them, two (Chris and Susan) begin saving right away.

Susan saves money for ten years, and then stops – perhaps she gets married, has kids, and her spouse is the sole bread winner.

Chris saves the same amount, but instead of stopping ten years from now, he continues to save all the way to age 65.

Bill doesn’t worry about saving. He decides that he needs to focus on paying down student loan debt. He uses this as an excuse not to keep a budget. Because he doesn’t budget, he unwittingly spends lots of money on drinks, shopping, and new furniture.

All three of them:

– Save $5,000 annually

– Earn the same rate of return

– Retire at age 65

Who comes out ahead?

The Results

Susan saves $50,000 over her lifetime. Bill saves $150,000 over his lifetime – and he didn’t begin until 10 years after Susan – when he realized that he needed to spend less money on partying. What does this mean for their retirement? Astonishingly, Susan will have over $60,000 more than Bill, who saved three times as much.

Now consider Chris, who started saving right away, and didn’t stop until he retired. By saving $50,000 more than his college friend over the course of his career, he ended up with over $1 million – nearly double both of his classmates.

Of course, this is all just a thought experiment – in real life, each of the three would like have different incomes, different amounts of debt, and different life circumstances. Nevertheless – the choices they made rippled through the years until washing ashore in retirement.

Compounding interest rewards those who begin saving and investing early, as illustrated in this chart from JP Morgan.
Image source: www.jpmorgan.com

The Bottom Line

Time moves quickly, and it’s easy to let it move you forward without being aware of what you’re leaving behind. If you aren’t saving, start now. If you’ve been considering putting away a little more, start now. Review your savings strategy on a regular basis – the difference could be hundreds of thousands at retirement, when you need it most.

What do you think? How have you overcome financial challenges to continue saving? Comment below!

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