Written by: Mathusan Mahalingam
If you are like many College/University students, the idea of saving for retirement while you are struggling to pay tuition sounds ridiculous – it did to me. You see, I have this idea that saving money means storing it in the bank; but that’s not really saving money. Why not? Because come September, time to pay tuition fees, that money is gone and I have zero dollars saved up for retirement.
While we invest money into our futures by educating ourselves, we forget that in terms of saving money, time is the magic potion. Time isn’t just what heals all wounds; time is what makes money grow. The more time you have the more money you will have when you’re ready to retire.
The average annual household income in Canada is approximately $60,000. And according to Statistics Canada, based on the average income earned and lifestyle led by Canadian households, those aged 40 and under will need approximately $2million to retire. Yes, $2 million dollars! And to make matters more complicated, experts suggest you will want to live off between 5-7% of your nest egg in your retirement years (that’s $100,000 to $140,000 annually).
Now, $100,000 – $140,000 may seem like a lot of money today, but if we do nothing with that money, with taxes and inflation, that money is actually a lot less valuable. Inflation and the growing cost of living results in your money being less valuable as time goes by. If you have $10 dollar sitting in the bank today, in another 30 years, that may only be worth $10 in the future. (Inflation has risen 3.5% in the last 30 years in Canada).
Have you ever seen your paycheck and then realized that tax, CPP, EI and workplace deductions shrink your paycheck even further? Well, that’s why experts say that for every dollar you make, you are only actually taking home about 70cents or less.
So how do we solve this dilemma of money in the bank depreciating value as time goes? We decide to take charge of our money, and invest it and save it for the future through compound interest and reinvested returns.
Instead of letting your $30 sit in the bank and only shrink as time goes, investing that $30 means that you can earn interest on that $30, and then reinvesting the money you made off that $30 allows your money to grow. Now, investing $30 for a year won’t make you a fortune, but over 50 years, it can grow – this is why time is key to money. The more time your money has time to grow, the more it will grow. The longer you wait to invest your money, the more chances you’ve lost in terms of allowing your money to grow.
If you save $150 monthly and invest it and earn say a 9% annualized return, when you’re twenty, at age 65, when you’re ready to retire, you’ll have $1 million saved up. But, say you decide that when your 30 years old, you’ll have to save $350 monthly to achieve the same amount. If you wait until your 40, you’ll need to save $900 a month to have that same million. So, start young, the longer you have to invest, the more you’ll have when you’re ready to retire.
References: Rich by Forty: A Young Couples Guide to Building Net Worth by Lesley Scorgie
Tags: Workaholics
