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Time – The Investor’s Best Friend (Young People, Take Note!)Time - the more, the better! That is the first, and probably most important, rule of thumb for savers. This rule is true, whether you are saving for retirement or for that trip someday to Disneyworld. The key to this well-known, but not widely-communicated, fact lies in the powerful combination of time and compounding, which yields future sums of money far exceeding what one would expect using simple "linear" projections. For math buffs, the time-compounding combination generates a "geometric" growth of dollars, not the typical straight-line "arithmetic" growth. If you’re interested in the details, your financial planner or investment professional can show you how to do the calculations. Warning - not for the faint of heart. The calculations involve the use of exponents, a financial software package, or an Excel spreadsheet. If you would rather leave all that to the professionals, here are a few illustrations of the almost-explosive and hard-to-believe power of time: A Million Dollars How long does it take to accumulate a million dollars (not counting winning the Lottery)? While the Lottery is a way to do it quickly, it is far from certain. Your chances are almost zero. But saving a million, while not certain, is potentially achievable. For example, the following savings rates will all yield $1,000,000 at age 65 at a 6% net rate of return:
Just waiting until age 35 to start saving that million, for example, compared to starting at age 25, requires twice the monthly contributions and 50% more total contribution dollars. And, you don’t have to be trying to accumulate a million. Maybe your goal is $100,000 or $500,000 or $5,000,000. It doesn’t matter. Just ratio your goal to one million then apply that ratio to all the above figures to determine your monthly savings rate and total contributions. The lesson here is easy to grasp. It’s never too late to start. But don’t wait! Start now. Start when you finish high school or college, when you have your first real job. In fact, start before then, setting up and contributing to a Roth IRA (for income tax benefits), for example, when you are still in school. Saving for 10 Years The following illustration is another way to look at the power of time. Here, we are saving $500/month for 10 years, then just letting the money sit and continue to grow to age 65. In all cases, total contributions are the same ~~ $60,000 ($500X12X10). Total accumulations at age 65, again assuming a 6% net rate of return, are:
Different example, same conclusion. The price of procrastination is a very heavy price to pay. The longer one waits, the higher the price. Don’t have enough money to start saving? While true for some folks, it is not true for most. It is a matter of setting priorities. Set up a spending plan. Pay yourself first by setting a fixed amount aside for savings each month. Allocate the remainder, after savings and taxes, to your other priorities. Draw the line where your income and total spending, including savings, are balanced. Of course, life is not that simple. The above were meant only as examples. A constant 6% rate of return is not guaranteed. Income taxes were not taken into account. And, savings goals should not be arbitrary. Such goals need to be consistent with your life plan and your other financial resources and are ideally established in partnership with a trusted financial planner. Likewise, your savings vehicles and target rates of return should also be consistent with your overall plan and guided by an investment professional. But the conclusion is clear. Don’t wait. If you do, time will become your enemy, not your friend. James Terwilliger, Certified Financial Planner™, is Vice President, Financial Planning, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext 50630 or by email at jterwilliger@cnbank.com.
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