Fortune Magazine is featuring 10 Rules for Building Wealth. Rule number one is something I wish I had known years before I did: Start early.
By starting early and saving a negligible amount per month, thanks to compounded interest and earnings on earnings, you can end up with more money than someone who starts later. The example provided by the magazine tells the story:
Employee A starts putting away $100 a month when she’s 22. Her money grows at 8 percent a year, and after ten years she stops contributing – and lets her stake grow. Employee B waits until he’s 32 to set aside $100 a month, also growing at 8 percent a year, and he keeps it up until he hits 64. When they both retire at 64, she will have $234,600, and he’ll have only $177,400.
This is the Butterfly Effect. Small changes can have drastic consequences when time is allowed to pass, and the difference is more pronounced with more time. But inflation is as powerful a force as compounding, and when you look at the numbers after taking inflation into account, the differences are less drastic. This is why you have to think beyond the standard personal finance advice. You hear often that all it takes is a little contribution each month to make you a millionaire… some time in the future.
By the time that happens, one million dollars will have the same buying power of “only” $400,000. Yes, it’s more than you would have if you hadn’t been saving, but don’t be fooled by the catchy “millionaire” title. By the time you’re a millionaire, everyone else will be, too. It’s not quite as special when you look at it that way.
Published or updated December 11, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.