I’ve felt an almost crippling sense of urgency to meet major financial milestones in my 20s. Whether I’m buying in to the “adulthood begins at 30” idea or just simply under stand that now is better than later, I set very high expectations for where my finances should be in my 20’s. And it’s only recently occurred to me how ridiculous that is.
Even though I’ve been saving for tomorrow what I earn today, I never actually thought about tomorrow will look like.
I’ve blogged before about how you face some of your biggest expenses in your 20’s, and you have to pay for them with what are likely the lowest wages of your lifetime. It seems backwards that the time we need money the most, we have the least of it, but that’s really how it goes.
I’ve been saving for retirement for nearly 4 years, but I have less than $40,000 saved in my RRSPs. I almost maxed my TFSA out once, and then most of it quickly got liquidated to pay for my MBA. I don’t own a house or a car, which means aside from my computer, the most expensive items I own are purses. How’s that for assets?
I’m almost 30 and my networth is still only a few ten thousand dollars.
It’s a little bit frustrating, to see the least. After years of hard work getting rid of my student loan debt and saving & investing, shouldn’t I have more to show for it? Actually, no. Even if I had opted not to go back to school for my MBA, I’d only just be scratching the other side of six-figures by 30. I wouldn’t even be near $250K, let alone approaching millionaire status.
So if years of hard work ultimately only make the difference of a few thousand dollars, what’s the point?
Time. The 40-ish working years ahead of you are your biggest asset in your 20s, not your paycheque. The first reason is the obvious one: the “magic” of compounding. I’ve pointed out in previous posts that $1 saved in your 20s is worth about $7 in your golden years. What that post leaves out is most of the gains actually happen in the last 15 years of your 40 year investment.
Crazy right? Your $1 only earns $0.28 in five years of your twenties, but $1.52 in five years of your 60’s (assuming your reinvesting the interest earned in the decades between to maximize the benefit of compounding interest). That means each $1 will grow by 239% in the first 25 years… and 365% in 15 years thereafter! The end result:
Most of your major wealth gains will happen at the end of your working lifetime.
Not only will your initial investments reap the largest interest gains in later decades, more likely than not your 30+ years of work experience is commanding the highest salary you’ve ever earned, giving you more money to save.
I’ve you’re like me, you may have mistakenly imagined your financial progress as linear, with your net worth gains relatively equal across the years and decades of your life, when in fact you’ll likely see dramatic exponential growth in your savings and investments in the last decade before you retire — and depending on how much you withdraw, maybe even after.
So next time you get discouraged about the small pile (or lack thereof) of cash sitting in your bank account, remember, the rest is yet to come.
We’ll be rich yet… once we get outgrow our twenties 😉