Saving Early & Letting Time Work for You

In 1964, The Rolling Stones released the hit single Time Is on My Side. While they were singing about love, the same idea applies surprisingly well to investing.

When it comes to building wealth, one of the most powerful advantages an investor can have is time. The earlier you begin saving and investing, the more opportunity your money has to grow through the power of compounding.

Whether you're contributing to a 401(k), IRA, Roth IRA, or taxable investment account, time can do much of the heavy lifting.

The Power of Compounding

Compounding occurs when your investment earnings begin generating earnings of their own. Over time, growth builds upon growth, creating a snowball effect that can significantly increase wealth.

Consider a simple hypothetical example. If you invest $1,000 today, contribute an additional $1,000 each year, and earn an average annual return of 5%, your account could grow to approximately $69,700 after 30 years. Of that amount, only $31,000 would come from your own contributions. The remaining balance would come from investment growth and compounding.

What's even more remarkable is that compounding continues working even when you stop making contributions. Once you've built a foundation, time becomes your greatest ally.

The Power of Starting Early

When people think about building wealth, they often focus on how much they save or the returns they earn. Those factors matter, but there is another variable that can be even more important: when you start.

Consider two hypothetical investors:

-The Early Starter contributes $10,000 per year for 10 years and then stops contributing altogether. Total contributions: $100,000.

-The Late Starter waits 10 years before beginning to save, then contributes $10,000 per year for the next 30 years. Total contributions: $300,000.

Assuming both investors earn the same average annual return, the Early Starter accumulates approximately $850,000 by age 62, while the Late Starter reaches approximately $888,000.

At first glance, the Late Starter appears to come out ahead. However, look closer. The Late Starter contributed three times as much money over the course of their career and ended with only a slightly larger balance.

The lesson is not that saving more is unnecessary. The lesson is that time can be incredibly valuable. The Early Starter gave their investments decades to compound, allowing market growth to do much of the work.

In many cases, a modest amount invested early can be more effective than a much larger amount invested later.

What This Means for You

Many investors delay saving because they assume they will be able to "catch up" later when they earn more money. While higher savings later in life can certainly help, those lost years of compounding can be difficult to replace.

If you're early in your career, focus on building the habit of saving consistently, even if the amount feels small. If you're further along, don't let this discourage you. The next best time to invest is today. While you can't recover lost time, you can still benefit from compounding going forward.

The most important step is getting started.

As investors have learned time and time again, time in the market is often far more valuable than trying to time the market.