This idea is a repeat of a post from January 04, 2009
I question your sanity if you don't understand the concept of compounding interest here!
Example 1 - Two people are used as example. One buys Starbucks coffee and pays $4.50 five times a week from 25 until 65, and the price rises at the rate of 3% each year. The second person wants the coffee, but instead chooses to save the money she would have used to purchase the coffee from age 25 until 65 into an investment inside a Roth IRA that grows at 12% a year. The net balance for the investment at age 65 is almost $1.5 million (TAX FREE!)
Example 2 - One pack cigarette smoker realizes that smoking is a bad thing. So at age 18, he decides that he quits buying cigarette, and starts saving the money ($3.80 a day, and increases at 3% a year) he would have used to buy cigarettes into Roth IRA growth mutual fund that grows at 12% a year from age 18 to 72. He looks at his investment, which has grown to $9.5 million.
Example 3 - A college graduate decides she is going to start investing $200 a month into Roth IRA growth mutual fund that goes up by 12%. She diligently saves from age 22 to 65, and increases contribution by 3% each year. The ending balance at 65 is about $4.4 million.
Look at other examples. If you brown bag, instead of buying lunch five times a week, and investing the unspent money, you can attain $1 million even if you start at age 30.
Opportunity cost of frequent expenses
Assume 3% inflation rate and 12% investment rate
Current monthly cost
final amount @ end age
1 pack of cigarett /day
Save regularly and increase 3% a year
update note: Some of these numbers are already stale. You can't buy a pack of cigarrett for $3.80 any more. So smoking a pack of cigarrett a day from age 18 to 72 could cost you $10 million in opportunity cost! Not only is there a huge money saving, your medical expenses will be significantly smaller, and you may even get to enjoy your grandkids!
Bottom line: We are all grown ups here. Most of you are not 18, 22 25, or even 30. Most of us wake up one day and say, "It's too late to save up for my retirement." My answer is a resounding, "No. You're never too old to start saving." As long as you breathe air, you should be saving something. If you are fortunate enough to have access to 401(k), look at the matching fund provision. Matching fund is FREE MONEY. Take full advantage in these tax advantaged accounts. Distribution from Roth is totally tax free after age 59 ½.
Don't wake up one day at 65 and realize you forgot to save, and now find yourself looking for a position at Walmart. If you are not investing, then start investing now.
DON'T EXPECT THE GOVERNMENT TO BAIL YOU OUT. YOU START BAILING YOURSELF OUT NOW!
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