Q: I have two children graduating from college this year. I'd like to teach them to save their money.
Can you show them -- with figures -- how much it will pay them to get the savings habit early? And please explain how important it is for them to put some money aside in their first few years of work, even if they won't be able to continue it once they have families.
A: The most dramatic illustration of the importance of early savings programs is the following example:
Two people invest $2,000 apiece each year for 15 years. Each person has invested a total of $30,000 during that 15-year period.
However, Person A begins at age 25 while Person B only starts to save at age 30.
Assuming the investments grow at a steady 10 percent a year (a return that has been realistically achievable over the past 20 years), here are the results:
At age 60, Person A would have more than $470,000, while Person B would have just under $292,000. Keep in mind that these results were attained with the same $30,000 investment and the same 10-percent annual return.
The only difference is that Person A started five years earlier. How's that for a lesson?