"Save early and save often" is pretty much the golden rule when it comes to savings and retirement. But a lot of Americans don't take the trouble to start saving until they see their golden years right around the corner.
Saving for the future shouldn't take too much of a back seat to the needs and wants of the moment. While you definitely need to make sure your current finances are in order, any delays in saving -- even small ones -- can have a profound impact on your future financial outlook.
It is through the miracle of compounding that the money you save early on has such a disproportionately large impact on your total savings amount.
With compounding interest, your gains are calculated on the money you contribute to the account as well as the accumulated interest. So while the actual percent or rate of return may not change from year to year, the balance in your account is growing and so each year your gains increase.
The longer your money is subjected to compounding gains, the larger your balance has a chance to grow, further increasing your gains. A delay of a year or two in savings can mean you'll miss out on thousands of dollars down the road. The savings calculator from BankingMyWay.com can help outline exactly how much you stand to lose by delaying -- and how much you stand to gain by starting right away.
The calculator requires you to enter a starting balance, how long your savings plan will last and how many years you plan to wait before starting to contribute. You will also need to enter an estimate for the rate of return you'll receive, as well as the amount and frequency of your planned contributions.
For example, say you plan to retire in 20 years and you need to decide whether it is really all that important to start saving now. You have an extra $5,000 a year that you could sock away in a mutual fund (or some other investment instrument) that earns an average of 8% per year.
If you start now and save $5,000 a year for the next 20 years, you would end up with $247,115. Wait just two years and that final number drops down to just $202,231.
That's losing out on $44,883 of savings from just $10,000 worth of investment.
And the longer you have to save, the more that $10,000 has time to grow. If you have 25 years until you retire instead of 20, starting now rather than waiting for two years will net you an additional $65,948.
If you don't have any room in your budget for savings, then work to free up a few bucks as soon as you can. Starting to save now can make a big difference down the road.