Making Your Savings Decisions
Why Should You Start Saving for Retirement Early? The Magic of Compounding
Directions: Work through the scenarios below. To calculate, search the Internet for the EconEdLink Compound Interest Calculator. When you think you have the answers, see the correct answers below.
Scenario 1
You start saving $100 a month at age 20. You earn an average of 4% annual interest, compounded monthly.
Enter these numbers in the compound interest calculator as follows:
Age: 20
Annual Interest: 4 percent
Initial Investment: zero
Monthly Savings: $100
By age 65, how much will you earn?
- $150,947
And how much was your principal investment?
- $54,000
Scenario 2
You start saving at age 50. You invest $5,000 initially, then $500 monthly with an average of 4 percent annual interest, compounded monthly.
Enter these numbers in the compound interest calculator as follows:
Age: 50
Annual Interest: 4 percent
Initial Investment: $5,000
Monthly Savings: $500
By age 65, how much will you earn?
- $132,147
And how much was your principal investment?
- $95,000
Time is Money
Saving small amounts can pay off massively down the road – far more than saving higher amounts later in life. Start to save regularly now (e.g., $50 from every paycheck) and take advantage of the time value of money.
Comparison of beginning to save at an earlier age vs. later in life.
| Age Started At | Initial Investment | Monthly Savings | Total Principal | Total Earnings |
| 20 years old | $0 | $100 | $54,000 | $150,947 |
| 50 years old | $5,000 | $500 | $95,000 | $132,147 |