I was working with some calculations the other day and something became ridiculously apparent to me. You and I (along with almost anyone) literally can’t afford to wait to start investing and savings.
Calculating Contribution and Investing Returns
I think a very simple example will provide evidence that you need to start contributing, investing and saving yesterday.
Person A vs. Person B
- Both are 22 years old
- Person A decided to contribute $2,000 for the first 10 years of his or her working life to any type of investment vehicle you can think of. Person A inexplicably stops after the first 10 years. Not sure why they would but its just an example.
- Person B thinks that he is unable to afford the contributions and says I’ll wait. He does wait but at the ripe age of 32 decides now is the time and invests that same $2,000/yr for the next 33 years.
- They invest in the exact same stocks, bonds, mutual funds, etc and receive 6% after tax linear growth until retirement at 65.
So Person A put in $20,000 and Person B put in $66,000 – who will have more money?
Person A
| Age | BOY Balance | Contribution | Growth | EOY Balance |
| 22 | $0 | $2,000 | $120 | $2,120 |
| 23 | $2,120 | $2,000 | $247 | $4,367 |
| 24 | $4,367 | $2,000 | $382 | $6,749 |
| 25 | $6,749 | $2,000 | $525 | $9,274 |
| 26 | $9,274 | $2,000 | $676 | $11,951 |
| 27 | $11,951 | $2,000 | $837 | $14,788 |
| 28 | $14,788 | $2,000 | $1,007 | $17,795 |
| 29 | $17,795 | $2,000 | $1,188 | $20,983 |
| 30 | $20,983 | $2,000 | $1,379 | $24,362 |
| 31 | $24,362 | $2,000 | $1,582 | $27,943 |
| 32 | $27,943 | $2,000 | $1,797 | $31,740 |
| 33 | $31,740 | $0 | $1,904 | $33,644 |
| 34 | $33,644 | $0 | $2,019 | $35,663 |
| 35 | $35,663 | $0 | $2,140 | $37,803 |
| 36 | $37,803 | $0 | $2,268 | $40,071 |
| 37 | $40,071 | $0 | $2,404 | $42,475 |
| 38 | $42,475 | $0 | $2,549 | $45,024 |
| 39 | $45,024 | $0 | $2,701 | $47,725 |
| 40 | $47,725 | $0 | $2,864 | $50,589 |
| 41 | $50,589 | $0 | $3,035 | $53,624 |
| 42 | $53,624 | $0 | $3,217 | $56,841 |
| 43 | $56,841 | $0 | $3,410 | $60,252 |
| 44 | $60,252 | $0 | $3,615 | $63,867 |
| 45 | $63,867 | $0 | $3,832 | $67,699 |
| 46 | $67,699 | $0 | $4,062 | $71,761 |
| 47 | $71,761 | $0 | $4,306 | $76,066 |
| 48 | $76,066 | $0 | $4,564 | $80,630 |
| 49 | $80,630 | $0 | $4,838 | $85,468 |
| 50 | $85,468 | $0 | $5,128 | $90,596 |
| 51 | $90,596 | $0 | $5,436 | $96,032 |
| 52 | $96,032 | $0 | $5,762 | $101,794 |
| 53 | $101,794 | $0 | $6,108 | $107,902 |
| 54 | $107,902 | $0 | $6,474 | $114,376 |
| 55 | $114,376 | $0 | $6,863 | $121,238 |
| 56 | $121,238 | $0 | $7,274 | $128,513 |
| 57 | $128,513 | $0 | $7,711 | $136,223 |
| 58 | $136,223 | $0 | $8,173 | $144,397 |
| 59 | $144,397 | $0 | $8,664 | $153,061 |
| 60 | $153,061 | $0 | $9,184 | $162,244 |
| 61 | $162,244 | $0 | $9,735 | $171,979 |
| 62 | $171,979 | $0 | $10,319 | $182,298 |
| 63 | $182,298 | $0 | $10,938 | $193,236 |
| 64 | $193,236 | $0 | $11,594 | $204,830 |
| 65 | $204,830 | $0 | $12,290 | $217,120 |
Person B
| Age | BOY BALANCE | Contribution | Growth | EOY Balance |
| 22 | $0 | $0 | $0 | $0 |
| 23 | $0 | $0 | $0 | $0 |
| 24 | $0 | $0 | $0 | $0 |
| 25 | $0 | $0 | $0 | $0 |
| 26 | $0 | $0 | $0 | $0 |
| 27 | $0 | $0 | $0 | $0 |
| 28 | $0 | $0 | $0 | $0 |
| 29 | $0 | $0 | $0 | $0 |
| 30 | $0 | $0 | $0 | $0 |
| 31 | $0 | $0 | $0 | $0 |
| 32 | $0 | $0 | $0 | $0 |
| 33 | $0 | $2,000 | $120 | $2,120 |
| 34 | $2,120 | $2,000 | $247 | $4,367 |
| 35 | $4,367 | $2,000 | $382 | $6,749 |
| 36 | $6,749 | $2,000 | $525 | $9,274 |
| 37 | $9,274 | $2,000 | $676 | $11,951 |
| 38 | $11,951 | $2,000 | $837 | $14,788 |
| 39 | $14,788 | $2,000 | $1,007 | $17,795 |
| 40 | $17,795 | $2,000 | $1,188 | $20,983 |
| 41 | $20,983 | $2,000 | $1,379 | $24,362 |
| 42 | $24,362 | $2,000 | $1,582 | $27,943 |
| 43 | $27,943 | $2,000 | $1,797 | $31,740 |
| 44 | $31,740 | $2,000 | $2,024 | $35,764 |
| 45 | $35,764 | $2,000 | $2,266 | $40,030 |
| 46 | $40,030 | $2,000 | $2,522 | $44,552 |
| 47 | $44,552 | $2,000 | $2,793 | $49,345 |
| 48 | $49,345 | $2,000 | $3,081 | $54,426 |
| 49 | $54,426 | $2,000 | $3,386 | $59,811 |
| 50 | $59,811 | $2,000 | $3,709 | $65,520 |
| 51 | $65,520 | $2,000 | $4,051 | $71,571 |
| 52 | $71,571 | $2,000 | $4,414 | $77,985 |
| 53 | $77,985 | $2,000 | $4,799 | $84,785 |
| 54 | $84,785 | $2,000 | $5,207 | $91,992 |
| 55 | $91,992 | $2,000 | $5,639 | $99,631 |
| 56 | $99,631 | $2,000 | $6,098 | $107,729 |
| 57 | $107,729 | $2,000 | $6,584 | $116,313 |
| 58 | $116,313 | $2,000 | $7,099 | $125,412 |
| 59 | $125,412 | $2,000 | $7,645 | $135,056 |
| 60 | $135,056 | $2,000 | $8,223 | $145,280 |
| 61 | $145,280 | $2,000 | $8,837 | $156,116 |
| 62 | $156,116 | $2,000 | $9,487 | $167,603 |
| 63 | $167,603 | $2,000 | $10,176 | $179,780 |
| 64 | $179,780 | $2,000 | $10,907 | $192,686 |
| 65 | $192,686 | $2,000 | $11,681 | $206,368 |
Yup, Person A has a larger balance ($217k vs $206k). It is easy to get into the details, and fall victim of paralysis by analysis, but one of the basic points of personal finance is that regardless of the synonym you want to use (investing, contributing, savings, etc.) it should have started yesterday.
Your math, as well as countless luminaries, have shown that time is your friend when it comes to compound interest.
Now to convince the world! or don’t b/c it isn’t my problem lol
I couldn’t agree more Evan. The calculator I have freely available off my website has a “Compounding Calculator” as one feature.
I just jumped my 401k up t more than double what it was (from 7% moved up to 16%). That hurts my pocket pretty bad, and now that I see how much it will change my paycheck – due to custom W-4 changes I made years ago – I have to run it through my budget to see the full effect.
I am confused…did you just double your contributions or realized you have to?
Scary right? I’m almost 50 due to late start… I was contributing only a tiny amount to my 401(k) and due to this very same math you mentioned – BIG CHANGE I too have jumped up my pay contributions at 15% will hit the max allowed contribution for the year.
Hindsight is 20/20, so it’s hurt me but at least I’ve got the gimball pushed in the right direction now. I hope others read your article too. Thanks for the detailed numbers. Regards, TK
Timothy…better late then never! Remember just b/c you are maxed out on 401K contributions it doesn’t mean your savings/investing should end. Start a non-qualified (non-retirement) investment account, maybe look into an insurance product or two made for retirement purposes or just horde cash!