Have you started saving for retirement? Do you think you’ll be fine if you start tomorrow? Maybe you’re satisfied with waiting until next year, or you think you can push this off for a few more years. You have plenty of time to worry about this later – right? No. Not really. You might want to think again and ensure you understand the cost of waiting. Yes, it can feel like there simply isn’t enough to go around when there’s rent and student loans to pay. You have expenses, bills, and other financial goals and priorities because retirement is decades into your future. But even putting away a small amount now can make a huge difference in having a comfortable retirement. You might feel like you can’t afford to save now, but in reality, you can’t afford to wait.

The Power of Compound Interest

When you invest, you earn interest on your money. You then earn interest on that interest. It’s called compound interest. It’s this extra bit of compounding interest that really makes a difference over the course of a working career. The best way to show it’s power is with an example: Imagine our friend Early Earl starts saving for retirement at age 25, investing $100 a month for 10 years, stopping at the age of 35. By the age of 35, he’s contributed $12,000 and with interest of 6%, his balance would be at $15,996.04. He leaves these savings in a retirement account and doesn’t touch the account until the age of 65. Assuming the annual return rate continues at 6%, when he looks at the retirement account at age 65 the account is worth $91,873.11. (This is Case 1 in the table below.) If Early Earl had contributed $100 for 20 years instead of 10, he would have contributed $24,000. With interest, he would have had $44,463.42 in his account. If he left the account alone until 65, at retirement it would be worth $142,600.21. (This is Case 2.) Unfortunately, Earl’s buddy, Late Larry, didn’t make retirement contributions at the age of 25. Instead, Larry waited until the age of 35 to start investing. He contributed $100 a month for 10 years until the age of 45 and received the same return of 6%. Even though he contributed and earned the same amounts, his account is worth only $51,301.47 at age 65 (Case 3). And even when he contributes $100 for twenty years, his account will only be worth $79,627.21 when he wants to retire – much less than his early-saving friend (Case 4). Let’s summarize that with this table:

CaseSaverAgeNo. of Years Contributing $100/MonthTotal Amount Saved (with Interest)Years to Compound (without Additional Contributions)Balance at Age 65Money Earned From Interest
1Early Earl25-3510$15,996.0430$91,873.11$79,873.11
2Early Earl25-4520$44,463.4220$142,600.21$118,600.21
3Late Larry35-4510$15,996.0420$51,301.47$39,301.47
4Late Larry35-5520$44,463.4210$79,627.21$55,627.21

Take a look at Late Larry who saved for 20 years (Case 4), and compare it to Early Earl, who saved for 10 years (Case 1). You’ll see that Larry was unable to match Earl’s savings. That’s because Early Earl, in both cases, gave his savings more time to compound and grow. These are extremely simple examples, but it illustrates the point: saving early makes a big difference. Here’s the take-away lesson from these people with really goofy names: with compound interest, you can contribute less money earlier in your career and still end up with more in the bank.

Ride the Market

While compound interest is a powerful part of saving early, there are also other advantages of starting to invest at a young age. With a longer investing time horizon, it’s easier to ride the ups and downs of the market. As a young adult, it’s generally safer to allocate a larger portion of your investments to higher return but more volatile assets like stocks as you have time on your side to ride out any market downturns and purchase investments at a lower price. If you wait until later to save, you’ll need to have a more conservative portfolio in your retirement accounts because you won’t have time to handle big blows to your net worth through riskier investments.

Start Now

Even though it’s tough to find the money at the start of your career, putting away a small amount of money now can make a huge impact in your retirement. By starting now, you can save less and still end up with more in your pocket.