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The Smartest Financial Decision You'll Ever Make

08/22/2016

Remember: your most limited resource is time.  There’s really only one thing young people need know about money: Save for retirement, starting now.

Yes, at some point you’ll want to pay off your debt, have an emergency fund and buy a home. Right now, though, you’re burning through your most limited resource, which is time. You can’t get make more of it, you can’t get it back when it’s gone, and you have a limited window to harness its power.

One way to illustrate this is with the story of Aadik, Fisayo and Amrita:

  • Fisayo starts contributing $5,000 a year to a retirement plan at age 25 and then stops contributing after 10 years.
  • Aadik, meanwhile, waits until age 35 to start and then contributes $5,000 a year until age 65.
  • Even though Fisayo contributed for far fewer years — 10 years, compared with Aadik’s 30 — his early start means he winds up with more money by the time they’re both 65: about $526,000, compared with Aadik’s $472,000.
  • Their friend Amrita catches on even earlier. She starts contributing at age 21 and stops 10 years later. At 65, she has $689,310 — 31% more than Fisayo and 46% more than Aadik.

These examples assume 7% annual returns, but the result is the same regardless of the return and contribution assumptions. The earlier you put your money to work for you, the more time you have to benefit from the magic of compounded returns. Your returns earn their own returns, which earn still more returns, in a virtuous cycle that accelerates the more time the money has to grow.

The longer you wait, the worse it gets

Another way to illustrate the same point is to take away the tailwind that an early start gives.

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