Time is Money

Even in Difficult Times

    Many readers are telling me it's becoming harder to save money. That's not surprising with the current price of gas and grocery bills seeming to increase each week. Under the circumstances, you might be tempted to think that the little money you have remaining, after handling everyday expenses, isn't really worth the effort of saving. But as I've said before, a small amount regularly saved can develop into a sizable sum. Even in the toughest times, you have a valuable ally on your side: time itself.
    Time is so important due to the power of compounding. Compounding occurs when your investment earnings are reinvested to produce returns of their own, which in turn can generate more returns. Overtime, these compounded earnings can add up to develop significant long-term results. When you consider the effects of compounding - like a snowball increasing as it rolls downhill - you begin to understand that it's more about how long you have to save, instead of how much.

    Here's an eye-opening example involving two sisters. Let's say that both sisters have an extra $200 each month. One sister, Sue, decides to start saving that money immediately by placing $200 in the bank each month for 10 years. Sue's sister, Mary, initially chooses to spend the $200 every month; however, after two years she also decides to put that money in a savings account.
    For the sake of illustration, let's assume that each sister made a consistent annual interest rate of 5 percent. At the end of 10 years, Sue would have $31,185, while Mary would have only $23,650. Postponing her savings plan for two years cost Mary $7,535.

    Here's another example that can really hit home for those saving for retirement. Imagine that John and Jane are both age 25, earn $50,000 per year and contribute to their 401(k) plans. John contributes 6 percent of his salary, while Jane contributes 7 percent of her salary each year. They both earn an 8-percent annual rate of return over the next 40 years. At the end of that 40-year period, John would have $839,343, and Jane would have $979,234. That 1 percent difference - just $500 a year - earned Jane an additional $139,891.

    The best time to learn how to save is when you're young; after all, that's when habits are so easily formed. I started teaching my own kids how to save early by opening a savings account and explaining how interest works. As an added incentive, some parents offer to match their kids' savings up to a certain point.
    If there's a young person in your life, whether a child or a young adult, you'd be doing them a big favor by explaining how their savings can eventually grow. Encourage them to start early. This is especially good advice for young people entering the work force -- they can get a huge jump on their retirement savings by contributing to a 401(k) or an IRA right from the beginning.

    Kids aren't the only ones who can use time to their advantage. No matter what your age, if you've been short-changing your savings, you still have time on your side if you decide to re-establish a consistent savings plan. Look for ways to cut back. Can you come up with $100 a month? $200? For encouragement, consider this: If you put $2,000 away at the beginning of every year (that's less than $170 per month) for 20 years and earn an 8-percent annual compounded return, you could have an additional $98,845 when you're ready to retire.
    You might be wondering, especially with the current market, if an 8-percent return is realistic. That depends on where you put your money. The Schwab Center for Financial Research estimates the following returns for stocks and bonds over the next 20 years:
. Large cap stock: 8.2 percent
. Mid/Small cap stock: 9.8 percent
. International stock: 8.3 percent
. Bonds: 4 percent
    Of course, these numbers are only estimates of average returns based on historical results; they aren't intended to represent future performance. During any year, stocks and bonds may earn far more or far less. No matter the amount of actual yearly returns, compounding will enhance your overtime return. The sooner you get your money working for you, the better.

    Thanks to the power of compound returns, what you do today -- or don't do -- can have a big impact on your ability to meet your savings goals. Try to stay focused. Resist the temptation to stop saving. Create a long-term plan for saving and investing that you can follow, even when times are tough.
    Whether you're comfortable with the risks of the stock market or you prefer to put your money into investments with predictable returns like CDs, the point is to keep your money working as well as growing over a long period of time.

Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co., Inc., Member SIPC. You can e-mail Carrie at This email address is being protected from spambots. You need JavaScript enabled to view it..

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