Who will save the most money? - The Power of Compounding
The earlier you save, the greater the number of future compounding periods you have before retirement. Compounding means that you will earn dividends on your dividends and/or earn interest on your interest so that your investments grow in an accelerated way. For example:
Paul earns $60,000 per year and saves $2500 each year for ten years.
Paul stops investing after 10 years and he does not begin to withdraw his savings/investments until age 65.
Even though Paul has invested $25,000 ($2,500 x 10 years), it will accumulate to $393,588, assuming the interest rate is 8% for the ten year period.
Victoria earns $100,000 per year and manages to save $25,000 for 30 years ( 35-65 years of age )
This will accumulate to $308,635 with an interest rate of 8%.
Even though Victoria saved $52,500 more than Paul, Paul earned $85,223 more by age 65. than Victoria.