Save now or regret it later

Saving as much as possible as early as possible is critical to staying rich.¹

It may be obvious to you that the more you save and invest, the greater the return you’ll receive. But investing earlier can be as important as investing more. This is often misunderstood because of how the human mind works -- it’s easy to visualize the stacks of bills you are saving up, but hard to visualize the precious extra time during which your money is working for you.

Never underestimate the importance of saving and investing your money as early as possible!

After reading the previous posts, you might be skeptical because they stressed the importance of investment returns over time as opposed to savings. And it is true that investment returns will eclipse your savings over time. However, your savings are what you use to buy your investments. The simple interest you’ll earn is proportional to your savings, and your compound interest is proportional to your simple interest. In the end, it’s all based off of your savings -- no savings, no nest-egg!

To make the importance of early saving clear, we’ll use our new grad example, and send them on a spending binge.

The five-year spending binge that never ends

Let’s say our grad decides to wait five years before starting to save money. And why not? They’ve worked hard to earn their degree(s) and find their job, and they want to treat themselves for a few years. Retirement is a long way away, don’t they have time to catch up? NO, due to compounding they will never catch up. Let’s analyze their costly mistake:

This graph shows two things:

1. Red line, left axis - The money lost from the grad’s portfolio each year, compared to if they had saved from the start
2. Blue bars, right axis - The amount of money lost cumulatively, from all prior years, compared to if they had saved from the start

Looking first at the red line, we see the obvious effect of 5 years without saving -- all that money is "lost" along with the investment returns they would have provided (almost $84,000 just in year 5). And as expected, once the spending binge is over, the money lost each year dips back down. But unexpectedly, even after the binge, the line keeps climbing, exponentially.

What this signifies is that despite the grad starting to save diligently again, they are still losing money each year due to their past mistake. Not only are they still losing money, but the amount of money they are losing grows exponentially each year.

The total cost of the decision to delay savings is staggering. If you look at the sum of the yearly losses (blue bars), you can hardly tell that they did start saving again in year 6. After 30 years the total cost of not saving those first 5 years is almost $3 million. That cost is nearly 10x the extra binge money spent in the first 5 years.

Why is delaying savings so costly?

To better explain why the decision to forgo savings is so costly, let’s look at how the grad’s portfolio will behave over time in different scenarios. The following graph shows their net worth if they start saving immediately (delay for 0 years) versus delaying any savings for 2, 5, 10, and 20 years.

As you might expect, delaying savings simply pushes the curve to the right -- your money will grow the same whether invested at year 0 or year 10. But it’s important to note that when you delay savings, the part of the curve that you’re lopping off is the part that’s earning you the most money.

This effect occurs because compound interest grows larger the longer your money is invested. It’s natural to think forgoing 5 years of saving in 30 years would reduce your portfolio by 5/30 = 16.6%, but that’s dead wrong. In reality, it is reduced by 37.2% due to losing out on earnings from the 5-highest earning years (the last ones).

You can see this most clearly by looking at the 20-year delay line in the graph above -- the nest-egg hardly has time to grow. However, you will lose money from nearly any delay. Delaying savings just 2 years ($120,000 spent rather than saved) will have a negative effect greater than $240,000 after 10 years. The loss reaches more than $1.3 million by year 30.

Because tech-workers have high incomes, they often have plenty of money to invest in the stock market (don't forget, you're rich!). Because they are often young, they have plenty of time for those investments to grow and compound. This opportunity-combo is rare and is extremely powerful for setting yourself up for the future.

Time is your greatest asset. Don’t waste it!