We often hear: "start saving early: it pays off!" But why is it so advantageous to start when you are young?
It all comes down to one simple concept: the impact of compound interest.
This means that your investments generate interest, and that interest generates more interest. The earlier you start, the more this effect grows over time. The result: your money works for you... for a long time!
Let's look at an example:
- Stephanie starts saving $1000 per year at age 25 and continues to do so for 10 years, until she turns 35. Her total investment is $10 000, but that money continues to grow in value thanks to interest. If she benefits from an average annual return of 5%, she will have
$61 400 by age 65.
- Frank starts saving later, that is, at age 45. He invests $1000 per year for 20 years, for a total of $20 000 invested. If he has the same return of 5%, he will have
$35 700 at age 65.
Even though Stephanie invests less money than Frank for a shorter period of time, she ultimately ends up with much more than him thanks to the effect of time and compound interest.
To see the magic of compound interest for yourself, try our
simple personal savings calculation tool.
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