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Should you start saving today or in 20 years?

Should you start saving today or in 20 years?

Do you think you should save $500 now or save $500 when you’re 35 years old? In this blog post, you’ll find out how early you should start saving your money! 

Let’s say that you’re 15 and have opened up a savings account with an interest rate of 5%. You plan on saving this money until you can retire at 65. By keeping your money in a savings account, interest is added. But this type of interest is unique. It’s known as compound interest. 

But what is compound interest?

When you reinvest your earnings, they earn interest as well. Compound interest is interest on the principal (the original amount of money invested) and the interest, which can make you money. 

Going back to our example from above, we are investing $500 at a 5% interest rate. We would have $25 after our first year, which isn’t much at first. Instead of pocketing $25, you would reinvest this money back into the savings account that has the 5% interest rate. When the second year has passed, the interest would be calculated on a $525 investment, which works out to be $26.25. If you continue reinvesting for the third year, your interest will be determined on a balance of $551.25. You can see from this example that the power of compound interest is considerable. 

We can hypothesize from the question I posed earlier that saving $500 now instead of when you’re 35 would be a better idea. Although there is only a 20 year difference between 15 and 35, time is very valuable. Remember that, as a teen, time is on your side. You can use the power of compound interest and save as much as you can for the future. 

Let’s see how much of a difference there would be if you save today vs waiting to save 20 years later, assuming that the interest rate remains at 5% and you don’t invest any more money into the account. If you delay investing $500 with an interest rate of 5% until the age of 35, you would have $2160.97 when you retire at 65. If you had invested the same money at the same interest rate 20 years earlier, you would have a total of $5733.70 after 50 years! Twenty years made a difference of $3572.73! And the larger the principal, the greater the difference. After 20 years, an initial investment of $5000 would yield a difference of $35727.29!

Note: If you regularly add more money into your savings account (monthly or yearly), you would have even more money in your savings at retirement! 

I hope that this blog post helped you to understand the importance of saving early and the power of compound interest! Be sure to ask your parents/guardians to help you open a savings account now; you don’t need to wait until you’re 18! Check out our personal finance courses to learn more about saving! 

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