Time is Money

Most of my friends, like me, either have a family or are starting a family. They are in a variety of financial positions. Some just recently claiming financial independents, some have had their butt handed to them in the monopoly game of life and are still brushing themselves off. But all of them, ALL of US, need to start thinking 20 or 30 or 40 years into the future despite the goings on in our lives right now.  

The truth is saving sooner is better than saving more. You have probably heard of the old adage; “Time is money.” Well, I say it’s false or at least, incomplete. Time is worth far more than money. And unfortunately it is the scarcest of resources. Nobody, especially nobody with a family has an abundance of time and even if they did it is not transferrable, they can’t sell it to you if they wanted. So use yours wisely. To illustrate my point think of the story of the Tortoise and the Hare.

We all know that story right? The Tortoise and the Hare are in a foot race for some wacky reason and the Hare is real cocky and the humble Tortoise just chugs along “slow and steady.” The Hare give the Tortoise a hefty lead and then takes off like a lightning bolt but the lead he gave the Tortoise proves too much and he loses the race. Pretty embarrassing really.

Here’s how it would go if it were a financial foot race. The person (or animal) with the most money for retirement after 30 years wins.

The Tortoise heads off the starting line in 2011, putting $1,000 in his Individual Retirement Account (IRA) and chugs along year after year socking away that same $1,000 for 30 years. (Total Contribution: $30,000)

The Hare gives the Tortoise a 10 year head start. In 2021, he starts saving $2,000 a year, twice as much as the Tortoise, for the remaining 20 years. (Total Contribution: $40,000)

At first glance it may seem as though the Hare finally beat the Tortoise. After all, he did contribute $10,000 dollars more. But if you look at the chart below you see clearly that the Tortoise with his mantra of “slow and steady” stuck it to the Hare yet again.

How could that be? The answer is simple; compound interest. Let me explain. The chart above assumes an average annual interest rate of 8% for both the Tortoise and the Hare. That means that one year after the Tortoise put in his first $1,000 it was worth $1,080. Then he put in another $1,000. Now he not only gets 8% interest on the $2,000 he has contributed thus far but on the previous year’s interest as well. By the end of year two he has over $2,245. Like a snowball rolling down hill collecting more snow as it goes, getting bigger and bigger, so does the interest earned each year.

The time component is so valuable that to catch up to the Tortoise the Hare would have had to contribute $2,446.23 each year. That is a total of over $51,000, more than $21,000 greater than the Tortoise’s contribution.

Compound interest is the single most powerful financial tool we have at our disposal. It gives everyone a chance to retire comfortably. You just have to start early. When you are young and starting a family retirement might seem so far away. You may think you can make up for lost time by contributing more, later. Truthfully, you can but it is at a much higher cost than you realize. You would be doing yourself and your family a huge service if you started sooner rather than later. Like the Tortoise showed us; every little bit counts, and it counts even more the sooner you start.