We save, basically, because we can't predict the future. If we could, we would know precisely how much money we would need for the things that we want and need in the future. But because we can't do this, the need to save money for the future is vital.
Think about these few reasons why:
Emergency reserve - This could be any number of things: a new roof for the house, out-of-pocket medical expenses, or a job layoff and sudden loss of income. You'll need money set aside for these emergencies to avoid going into debt to pay for what you need.
Retirement - We all have dreams of leaving the 9 to 5 someday, whatever form that may take you'll probably need savings and/or investments to take the place of the income you'll no longer get from your job.
Average Life Expectancy - With more advances in medicine and public health, people are now living longer (and needing more money to get by).
Volatility of Social Security - Social Security was never intended to be the primary source of income and should be treated as a supplement to income.
Education - The costs for private and public education are rising every year, and it's getting tougher to meet these demands.
Without money put away in savings and/or investments, you may open yourself up to other risks as well. For example, not having enough money to pay for emergency dental care may force you into taking a loan that your savings might otherwise have covered.
How important is it to begin putting aside money for savings right now, as opposed to sometime later?
The following chart illustrates the effect of compound interest on savings over the course of 40-plus years. It shows that now is the time for saving.
The sooner you start to save, the greater the benefit of compound interest. Compound interest is the interest earned on reinvested interest, in addition to the original amount invested.
Here's an example: Two different individuals--Darryl and Cheryl, each 22 years old--have an extra $2,000 a year to invest or spend as they choose. Darryl opens an Individual Retirement Account (IRA) to start saving. Cheryl chooses to spend her $2,000.
In this example, Darryl's IRA earns 12% per year. Darryl saves $2,000 per year for six years, then never puts another cent into his IRA.
Cheryl spends her $2,000 per year for six years. After that time, she invests $2,000 per year until she is 65 years old. Cheryl earns the same 12% interest per year that Darryl does.
Cheryl spends her $2,000 per year for six years. After that time, she invests $2,000 per year until she is 65 years old. Cheryl earns the same 12% interest per year that Darryl does.
The chart below shows the value of Darryl's and Cheryl's respective IRAs, from the time they are 22 years old all the way to 65. Keep in mind, Darryl's total investment is $12,000 ($2,000 per year for the first six years), while Cheryl's is $74,000 ($2,000 per year for the last 37 years).
Age Darryl Cheryl
22 $2,240 $0
23 4,509 0
24 7,050 0
25 9,896 0
26 13,083 0
27 16,653 0
28 18,652 2,240
29 20,890 4,509
30 23,397 7,050
35 41,233 25,130
40 72,667 56,993
45 128,064 113,147
50 225,692 212,598
55 397,746 386,516
60 700,965 693,879
65 1,235,339 1,235,557
As you can see, with compound interest, the earlier you start saving, the better. Darryl only had to save for six years while Cheryl worked to catch up by saving $2000 every year until she retired.
The important thing is to start saving your money now--no matter how large or small the amount!
