Why saving early beats saving more
1 min · 2 chapters
Personal finance. A sample lesson, free to watch.
The question
If you save less but start earlier, why can you end up with more money than someone who saves more later?
The lesson in words
The puzzle
Two savers each put in one thousand dollars a year, at seven percent interest. Early saves for ten years, then stops. Late waits ten years, then saves for thirty. Early puts in ten thousand in all. Late puts in thirty thousand. Late put in three times as much. So how could Early come out ahead?
Here is the picture most of us carry. Each thousand earns the same seventy a year, and nothing more. Equal steps of interest stack on both columns, so each one climbs steadily. Late stays taller. At year forty, who has more? Make a guess.
Interest on interest
Here is year forty. Early has about one hundred and five thousand. Late has about ninety-four thousand, though Early put in a third as much. Watch it year by year. Interest is earned on the whole pile, so Early's glowing part keeps growing after year ten, with no new deposits. In year forty, Early's pile adds about six thousand nine hundred in interest. The flat picture gave seven hundred. Now scrub through the years, and switch between the two ways of earning interest.
Take Early's first thousand. After thirty-nine years, it has become about fourteen thousand. Now Late's last thousand. It is still one thousand. Early's deposits sit for decades. Each of Late's sits for fewer years, so ten early deposits beat thirty late ones. The later you start, the fewer years each deposit has to earn interest on interest, and saving more cannot fully make up for it.
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