2. Saving vs. Investing
a. How time impacts saving and investing (continued)
Let’s examine the advantages of investing early.
When you turn 21, you begin investing $1,000 each year for 10 years. That’s less than $85 a month. You invest in an account that grows by an average of 7 percent each year. After the 10 years, you don’t contribute any more money, but you leave your money in the same investment account until you’re 65.
At the age of 65, your total investment amount will be $137,862. If you wait until you’re 40 to begin to invest $1,000 per year and do so until age 65 (a total of 25 years) making the same average return, you will have $63,249 at age 65. That is a difference of $74,613. What a difference!!! Let’s say you start investing at age 21 $1,000 every year until the age of 65. With an average return of 7 percent you would have $266,121.
Once consumers have earned money, they have an important choice to make: spend it or set some aside so it can grow even more. Many consumers make decisions according to the rewards or penalties involved with their choices. This is a rational thought. What might happen that is positive and takes me closer to my long-term goals (reward)? What might happen that is negative and takes me away from reaching my long-term goals (penalty)?
Consider the example of Rita, whose company is making some drastic changes. She is worried about losing her job. She starts setting aside money to cover monthly expenses in case she loses her job. Her incentive for saving is the reward of financial stability in the case of a layoff.
If Rita had not made the rational choice to save money in case she loses her job, the penalties might have been grim. If she lost her job, she may not have been able to pay her rent, buy food, make her car payment, or even have money to look for another job.
There are many different incentives to save and invest – financial security, future income, or even being able to purchase something you really want. Think about what your current and future saving and investing incentives or penalties might be. Below is an exercise that may help you identify incentives for saving and investing.
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