Why You Need to Start Early

I wish I could go back in time so that I could tell my 20-year-old self that he needs to start saving (or investing). It doesn’t really have to be a huge amount. Just whatever he can sock away, as long as he does it religiously, will eventually lead him to becoming better off significantly than if he does it later in his life.

Why? Because of compounding. The short video of Dave Ramsey below explains this better. By the way, Dave is a personal finance personality, author, and businessman.

Just some disclaimers though.

In the example table, the savings interest showed is 12% per annum. Right now, I don’t think there’s any bank that would provide you with such huge amount of annual interest. In fact, I doubt there’s any bank that offers savings interest beyond 5%. (This article from Moneymax shows a list of high-interest savings accounts. The highest here is 4% to 4.5%, for a digital-only bank called Tonik. For traditional banks, the highest is just 1.66% per annum, which is with Citibank.)

The example is in US dollars, so the “2,000” figure is just a small amount on that currency. In the Philippine context, that’s around PhP100,000 saved annually (an average of PhP50:$1), or PhP8,333.33 per month. How the heck can you save PhP8k per month if you are earning just PhP15k per month?

Well, as I mentioned above, it doesn’t have to be a big amount—just make sure you do it religiously. Avoid the milk teas and fancy coffee for the time being. (Assuming you buy a milk tea and a coffee once a week. That’s four cups of milk tea and four cups of coffee per month. Let us assume, for the simplicity of computation, that a cup of milk tea is PhP100, and a large cup of coffee is PhP150. For those beverages alone, you are already spending like PhP400 + PhP600 = PhP1k per month, or PhP12k a year. Of course, it doesn’t mean you have to deprive yourself of such “luxuries”; maybe limit it to once a month for each? Consider it “delayed gratification”. After all, the topic of this post is why you have to start saving early. If saving is not your priority, then, better be on your way and browse other things.

Anyway, going back to the video, Ben only saved 2k per year, for 8 years ONLY (he started at age 19, stopped at age 27—starting that year, he no longer added to his savings account). Arthur, on the other hand, only started at age 27. Sure, the same interest per year (12%). When they reached 65 years old, Ben has a total of $2.29 million, while Arthur only got $1.53 million. Consider this: Ben STOPPED at age 27, while Arthur saved FROM 27 until 65. Ben’s total investment was $16k (for those eight years), while Arthur saved $78k from age 27 to age 65—that’s for 38 years! YET, his savings is $700k LESS than what Ben achieved. It’s like, at age 27, Ben is no longer saving and enjoying his $2k every year. Whereas Arthur has to continue saving that $2k. Imagine if Ben continued saving until he is 40 years old.

That’s the value of starting early. Which is why time is gold.

Sure, we can present this in Philippine peso. It may not be the same amount, but the overall growth will be in the vicinity of the above example. (Just contact me if you need specifics on this.)

The key is you HAVE TO START EARLY.

 

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