This piece is sponsored in part by Stash, a finance app that allows you to start investing with as little as five dollars.
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Why does Grandpa always tell you about the importance of saving money early in life? No, not because he’s senile. And no, it’s not because he loves you. Grandpa’s telling you to save early because he, like other immortal badasses from Albert Einstein to Fetty Wap, knows the importance of compound interest.
As Einstein put it, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
And, as translated by Fetty Wap:
“Ay, where the dough at, baby?
In the bank, you know I ain’t tryna blow that, baby
Ay, we gon’ save that money (I’m so thrifty)”
So, yeah. Fetty Wap and Einstein were basically trying to send the same message: If you aren’t a saver, you’re a spender, and you’re missing out on the interest you should be racking up.
Get your compound on
Compound interest can be summed up as interest on your original interest, it’s pretty powerful stuff. Saving money may seem boring at first but once you add compound interest and time, your savings can take on a life of their own.
Seeing those upward sloping investing charts are much more fun to review when you are on the top end than when you’re starting out at the bottom. But the key here is to remember that saving early is the key to financial success.
So, how can saving and compound interest come together to make our financial lives more profitable? Through investing, duh.
The earlier you start saving to invest, the more interest you will earn in your lifetime.
The earlier you start saving (and, thereby, investing) the more interest you will earn in your lifetime. Apply this to the concept of time value of money, which states that a dollar today is worth more than a dollar in the future, and you see the need to invest early.
Meaning if I gave you $100 today (which I would never do because I’m cheap, ask my girlfriend) it would hold more value to you than $100 at the end of the year. The main catch here is that you could theoretically invest that $100 in an interest bearing investment and have more money by the time that period is over.
Time for me to throw some numbers at you, feel free to impress your parents with these facts next time they call.
Person A and person B both start with an initial investment of $1,000 and a four percent interest rate compounded annually. They’re looking to retire at age 65. Each will contribute an additional $100 per month, as well, for the duration of the investment. The only difference between the two is that person A started saving at 25 years old and person B waited until they were 35.
At age 65, person B will have accumulated roughly $71,995 — not a bad return, but not nearly enough to live comfortably in retirement. At the same age, person A will be able to check their account balance and see a nice, fat, six-figure number in the area of $121,287 — almost $50,000 more than person B! That’s a whole lot of early-bird specials, people.
The moral of this tale starring Mr. Wap and Mr. Einstein is the following: start saving as early as possible, so that you can turn your piggy bank into real investments.
It may not seem like much now, but, some day, your future self will understand what a G you were so early on.
Check out Stash to learn more about how to invest from the comfy confines of your couch.
Header image: Getty
This material is provided for educational purposes only to provide information regarding the mathematical principles of compound interest. There is no guarantee that any specific interest rate can be obtained from any investment vehicle.