Saving for the future can be a real challenge. It’s human nature to want to enjoy things now, so sacrificing today to put money aside for the years or even decades ahead is difficult for many.
As the saying goes, though, good things certainly come to those who wait. The sacrifices that you make now can have a profound impact on your future finances. In fact, you could easily have an extra half-million dollars for retirement, with only a little dedication and patience today.
How Much Could You Save in 30 Years?
Thanks to compound interest, the dollars you set aside today will continue to grow and grow over the years. The longer you let that money sit and compound, the larger your balance will grow.
Let’s say you decided to save $125 a week now (or $500 a month) in a high-yield savings account. You plan to contribute monthly, and don’t intend to touch that money for the next 30 years.
Over three decades, the actual contributions into your savings account would total an impressive $180,000. This number alone is nothing to scoff at, of course; with the power of compound interest, though, your balance could be expected to balloon by tens of thousands of dollars.
Of course, it’s impossible to know what interest rates will do in the years to come. We could see skyrocketing rates just as we could see APYs (annual percentage yield) plummet. However, let’s just see the math at today’s high-yield savings rates, for simplicity’s sake.
Using the calculator at Investor.gov, we can see that a $500 monthly contribution into a savings account earning 1.7% APY grows to $233,123.75 over time. That’s more than $53,000 in “free” money, thanks to compound interest.
Choose to put your savings in a certificate of deposit (CD) instead, and you may be able to earn even more. For instance, some CDs today offer around 2.2% APY. At that rate, your savings would grow to over $252,141 in 30 years, earning you an extra $72,141.72 on top of your monthly contributions.
|With $500 monthly contributions||Earning an average of 1.2% APY||Earning an average of 1.7% APY||Earning an average of 2.2% APY|
|After 30 years||$180,000||$215,845.76||$233,123.75||$252,141.72|
Where You Save Your Money Matters
As you can already see, it is important to put your money in an account that earns as much as possible, while also maintaining a risk level that keeps you comfortable. While a savings account or CD is a safe choice that still earns a modest return, you could earn even more by putting that extra $500 into a different savings vehicle.
Historically, 401(k) retirement savings accounts have an average rate of return somewhere in the 5-8% range. While your actual return is always contingent on market trends and the investments/risk tolerances you select, putting extra savings in your portfolio is a better way to earn even more than you would with a savings account.
“Between 1926 and 2018, the average annual return of the S&P 500 was about 10%. Adjust that 10% for inflation, and that brings you to an average annual, real return of 7%,” wrote The Motley Fool’s Catherine Brock.
Individual years may return more or less. Over decades, however, investing broadly in the stock market has actually been very predictable (though it’s always important to remember that past performance does not guarantee what happens in the future).
As an example, if you contribute $500 a month and earn an average return of 6.5% annually, your retirement account could easily grow to over $530,000 in 30 years. Even earning a below-average annual return of 4.5% would result in a balance of over $367,000, more than doubling your cash contributions in 30 years!
|If you put your contributions in a…||Savings account earning 1.7% APY||CD earning 2.2% APY||401(K) with an average return of 4.5% annually||401(K) with an average return of 6% annually|
|Your balance after 30 years will be…||$233,123.75||$252,141.72||$375,404.70||$490,128.23|
Of course, investments involve added risk and expenses, and returns aren’t guaranteed. However, you can easily see how much it matters when choosing where to put your savings.
If You Can’t Spare $500 a Month…
I understand setting aside $500 a month might be a stretch for some households. If that’s the case for you right now, don’t fret — you can still build an impressive nest egg by putting aside whatever you can.
For instance, let’s say you’re only able to save $100 a month. After 30 years, you will have contributed $36,000 out of your own pocket into savings, but thanks to compound interest, you may see a balance that’s much higher.
|With $100 monthly contributions||Earning an average of 1.2% APY||Earning an average of 1.7% APY||Earning an average of 2.2% APY|
|After 30 years||$36,000||$43,169.15||$46,624.75||$50,428.34|
Even earning a mere 1.2% APY with your savings account would earn you an extra $7,169. That’s money you didn’t work to earn, which can go toward your retirement expenses (or even a fun family vacation).
Save Now, Spend Later
The most important rule in saving is to set aside as much as you can as early as possible. Whether you’re able to put $500 a month into savings today or not, strive to put as much as possible into the account of your choosing.
Compound interest will work to grow your money over the years. The longer you save, the higher your savings will grow. And of course, as your career progresses and your financial situation changes, you can always increase those monthly contributions to earn even more.
With a little dedication (and some key discipline), today’s savings could easily be tomorrow’s comfortable nest egg.
–By Stephanie Colestock