Take a minute to reflect back to your high school English class. Imagine it’s the first day and the teacher is introducing themselves, talking about their expectations for the year, and discussing your final term paper. This English teacher, fully aware of every high school student’s propensity towards procrastination, has developed an idea to encourage their students to not wait until last minute to write their term paper. Your teacher, much to every student’s terror, announces that you have a 29-page paper due at the end of the school year, but there is a caveat. The sooner you turn in the paper, the shorter it can be. Now for round numbers sake, we are going to pretend that there are 40 weeks in your school year and the below table shows the required length of your paper if it is turned in at each of the specific intervals:
The numbers look strange, so please bear with me. Essentially, if you turn in your paper by week 5 it only needs to be 5.5 pages, at week 10 the requirement is now 7.2 pages, at week 20 the length has grown to 12.2 pages, etc. Although this approach seems unconventional, even the average high school student can see the enormous advantage to starting early and not waiting until the last minute when the task becomes almost too daunting to achieve.
This is also a lesson in investing. The numbers you see above are actually derived from a Time Value of Money equation that examines different amounts required to save $3,000,000, depending on how early the investor begins:
Let’s break down the table:
If the investor starts 40 years from his retirement he’ll need to save $859/month or $412,488 total over the 40-year period to arrive at their $3M retirement account (hence where the 4.1 pages is derived from).
If that investor waits until he is only 20 years out from retirement he will need to save $5,093/month for a total of $1,222,368 over that time period to equal the same $3M account. By getting started 20 years later when half his original time has run out, he will need to save almost triple the amount, but what’s more troubling is that he per month savings amount has gone up by almost six times the $859/month requirement of the early saver!
Undeniably, it’s important to remember that procrastination is bad. We learned this lesson over and over again in high school, and must remember it as adults making wise financial choices. Procrastination becomes much worse when the task actually grows the longer you wait. Nowhere is this clearer, or potentially more beneficial, than investing early in your future. So, start today, you can reduce both the monthly and total amount you need to invest for your future into a fraction of what you will need to contribute if you continue to wait!