How time and consistency can be your friend - By Chris Wallace, Primerica

Primerica believes the ultimate key to financial success is knowledge– about how money works, how to make responsible, well-informed decisions and how to get the best value for the dollars you spend. As part of Primerica’s continuing commitment to consumer education, over the next several months we will discuss common sense financial concepts that can help people overcome the obstacles they face and achieve their goals. 

This month we will focus on the second principle: How time and consistency can be your friend.

The first thing you need to understand that any great savings plan needs three types of basic accounts:

Emergency fund: This is your reserve fund in the event of an unforeseen emergency. Job loss or an unexpected expense. A good rule of thumb: Set a goal of having three to six months’ salary in your emergency fund.

Short-term savings: This account is for money that you could set aside for expenses you want to purchase within a short-term time frame. For example, here is where you would save for a car or vacation you plan to purchase in 2-5 years.

Long-term savings/investments: This is where your retirement savings, college funds and other long range savings will go. Because these are savings have more of a long-term time horizons, you can use investment vehicles with potential for a higher rate of return, such as equity mutual funds.

Someone once said that the only two things life gives you are opportunity and time. Time, combined with two other important elements, rate of return and consistency, is a powerful key to achieving financial security.

It pays to start investing early. Suppose your parents had deposited $1,000 on the day you were born. If you left that account untouched until you turned 67, that $1,000 would have grown to $406,466 – without your ever having added another penny.

Don’t pay the high cost of waiting. If you are like most people, you do not have a lot of money. That’s why time is so critical. When you’re young, you can save small amounts of money and still end up with thousands of dollars. If you wait to begin saving, you must save much more. If you want to be financially independent, you have no choice- you must start now or later you must save more. One thing is certain: You can’t afford the high cost of waiting.

If your goal is to save $500,000 for retirement

at age 67, look at the difference time makes:

Monthly Savings Required

Begin at           Save    Cost to wait

Age 25                        $89

Age 35                        $224    more than 2 times more

Age 45                        $602    nearly 7 times more

Age 55                        $1,926 more than 21 times more

The sooner you begin to save, the greater the

growth on your investment.

The High Cost of Waiting

$100/month at 9 percent

Begin saving at: Total at age 67:                     Cost to wait

Age 25                        $566,920

Age 26                        $517,150                     $49,770

Age 30                        $357,240                     $209,680

Age 40                        $137,780                     $429,140

Add consistency to time and the game is over. You’ve seen how time can be the best friend of growth. But most people don’t have $1,000 to deposit all at one. They must depend on smaller amounts, invested on a schedule, to build wealth. If that’s your situation, consistency can be the fuel that makes your investment grows exponentially.

Remember the parents who deposited $1,000 at a hypothetical rate of return of 9 percent when their child was born? The annual interest would be $90. And $90/year, when multiplied by 67 years, is $6,030. Then how did Paul withdraw more than $406,000 at age 67? Because one of the most important rules to wealth you can ever learn: The power of compound interest. Here is how it works.

The first year’s interest on the investment, 9 percent, or $90 was credited to the $1,000 to make $1,090. The next year $98 was earned on the $1,090. The total in the account was then $1,188. As the account grew, each year the interest payment was calculated on the total in the account,

including all the past interest payments. The compounding of the interest is how $1,000 grew to more than $406,000. With the power of compound interest at work for you, you’ll be amazed at how quickly a few hundred dollars can become a thousand.

Albert Einstein has often been quoted as saying “Compound interest is the most powerful force in the universe.”

There’s another critical key to building financial security that’s often overlooked. It’s the interest rate (sometimes referred to as the rate of return). The difference of a few percentage points may seem minor, but the impact of the rate of return when combined with time is significant. You might think that if you could earn a 9 percent rate of return instead of 4.5 percent, your money would double. Not so! Remember the “power of compound interest?” That 4.5 percent difference adds up to much more over time – and can mean thousands of dollars to you and your family.

Now you can see why the rate of return you receive on your savings or investment account is so important. Your main objective in saving is to accumulate as much cash as possible. You can reach the same objective in one of two ways: Save more money and accept a lower return or save less money at a higher return.

What really matters is that you save something. We all have a bill that is eventually coming due. It is called retirement. What we pay now will determine our quality of life when we decide to retire. I do not like to think of retirement as being all done, I like to think of it as making work optional. I think that is what we would all like as soon as possible.