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Cooperative Extension Service |
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Agricultural
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Early Childhood
Dale Bumpers College
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Money and Marriage
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Saving Now vs. Saving Later |
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Beginning |
Monthly |
End Result |
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Now |
$50 |
$33,394 |
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In 10 Years |
$150 |
$29,027 |
The chart above compares the two options over a 20-year period
While the end results in the example don't appear to be substantially different at first glance, consider these "hidden" figures. If you begin investing now, in 20 years you will have invested a total of $12,000. Wait 10 years and you'll end up investing a total of $18,000. If you wait, you will have to set aside $6,000 more to earn $4,367 less in 20 years. Keep in mind, this example assumes you can earn an average of 9 percent during the 20-year period.
It is never too late to as much as you can about investing. It's not difficult and can be quite profitable.
$ Time Value Of Money
You are ready to start investing when:
1) Your income exceeds your spending;
2) You have an emergency savings fund equal to 3 to 6 months' living expenses;
and
3) All insurance needs including life, health, disability, and property are
covered.
The Impact of Time Value of Money at 9% Interest
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Contributions |
Contributions |
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| Age | Made Early | Age | Made Later |
| 22 | $ 2,000 | 22 | $ 0 |
| 23 | 2,000 | 23 | 0 |
| 24 | 2,000 | 24 | 0 |
| 25 | 2,000 | 25 | 0 |
| 26 | 2,000 | 26 | 0 |
| 27 | 2,000 | 27 | 0 |
| 28 | 2,000 | 28 | 0 |
| 29 | 2,000 | 29 | 0 |
| 30 | 2,000 | 30 | 0 |
| 31 | 0 | 31 | 2,000 |
| 32 | 0 | 32 | 2,000 |
| 33 | 0 | 33 | 2,000 |
| 34 | 0 | 34 | 2,000 |
| 35 | 0 | 35 | 2,000 |
| 36 | 0 | 36 | 2,000 |
| 37 | 0 | 37 | 2,000 |
| 38 | 0 | 38 | 2,000 |
| 39 | 0 | 39 | 2,000 |
| 40 | 0 | 40 | 2,000 |
| 41 | 0 | 41 | 2,000 |
| 42 | 0 | 42 | 2,000 |
| 43 | 0 | 43 | 2,000 |
| 44 | 0 | 44 | 2,000 |
| 45 | 0 | 45 | 2,000 |
| 46 | 0 | 46 | 2,000 |
| 47 | 0 | 47 | 2,000 |
| 48 | 0 | 48 | 2,000 |
| 49 | 0 | 49 | 2,000 |
| 50 | 0 | 50 | 2,000 |
| 51 | 0 | 51 | 2,000 |
| 52 | 0 | 52 | 2,000 |
| 53 | 0 | 53 | 2,000 |
| 54 | 0 | 54 | 2,000 |
| 55 | 0 | 55 | 2,000 |
| 56 | 0 | 56 | 2,000 |
| 57 | 0 | 57 | 2,000 |
| 58 | 0 | 58 | 2,000 |
| 59 | 0 | 59 | 2,000 |
| 60 | 0 | 60 | 2,000 |
| 61 | 0 | 61 | 2,000 |
| 62 | 0 | 62 | 2,000 |
| 63 | 0 | 63 | 2,000 |
| 64 | 0 | 64 | 2,000 |
| 65 | 0 | 65 | 2,000 |
| Amount Available At Age 65 |
$579,471 | $470,249 | |
| Total Invested | $ 18,000 | $ 70,000 | |
$ Investment Choices
The Financial Planning Pyramid gives investment choices. Insurance products at the base of the pyramid provide protection against loss. The second rung of the pyramid gives products which are low risk and lowest earnings. These products are good for savings and emergency funds. Products on levels three and four are stocks and bonds which are considered conservative investments. They provide some income and some growth. Speculative (and more risky) investments in the top of the pyramid.. They have the potential for the highest earnings but also carry the highest risks.
Complete these items about your Investment Choices.
1. List your current investments on the pyramid.
2. Where do the majority of them fall?
3. Do they meet your risk tolerance?
$ Why Should You Invest?
Check and discuss your reasons.
______To accelerate the growth of your savings
______To put your available money to work
______To accumulate a down payment for a home
______To increase your current purchasing power
______To decrease your reliance on consumer loans
______To decrease income lost on interest payments
______To provide for your children's education
______To create a sizable retirement nest egg
______To enable an earlier than expected retirement
______To increase your wealth, security and independence
______To provide advantages for your loved ones and heirs
$ A Tool For You
The "Rule of 72" is a quick and simple way to estimate how your money can grow. You can use this rule in two ways.
(1) Divide 72 by the interest rate you expect to earn. This will show how many years it will take to double your money.
Let's assume you are going to be earning 6% interest on your money.
| 72 | = | 12 Years |
| 6% Interest |
(2) Divide 72 by the number of years in which you want your money to double. You will get an estimate of the interest rate you will need to earn.
Let's assume you want your money to double in 6 years.
| 72 | = | 12% Interest |
| 6 years |
Try It!
How many years will it take you to double your money with your choice of interest rate?
| 72 | = | ___ years |
| ?? % Interest |
$ Top 10 Ways To Prepare For Retirement
1. Know your retirement needs.
Retirement is expensive. Experts estimate that you'll need about 70 percent of your pre-retirement income – lower earners, 90 percent or more – to maintain your standard of living when you stop working. Understand your financial future.
2. Find out about your Social Security benefits.
Social Security pays the average retiree about 40 percent of pre-retirement earnings. If you contribute to Social Security, you will receive a personal statement each year. If you would like an estimate of your retirement benefits, call the Social Security Administration at 1-800-772-1213 to request a copy.
3. Learn about your employer's pension or profit sharing plan.
If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you request one. Before you change jobs, find out what will happen to your pension. Learn what benefits you may have from previous employment. Find out if you will be entitled to benefits from your spouse's plan. The U.S. Department of Labor, Employee Benefits Security Administration, has several publications that discussion worker’s pension benefits. Visit their web site at http://www.dol.gov/ebsa/.
4. Contribute to a tax-sheltered savings plan.
If your employer offers a tax-sheltered savings plan, such as a 401(k), sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, deferral of taxes and compounding of interest make a big difference in the amount of money you will accumulate.
5. Ask your employer to start a plan.
If your employer doesn't offer a retirement plan, suggest that it start one. Simplified plans can be set up by certain employers. For information on simplified employee pensions, order Internal Revenue Service Publication 590 by calling 1-800-829-3676 or find it online at http://www.irs.gov/formspubs/.
6. Put money into an Individual Retirement Account.
You can put $2,000 a year into an Individual Retirement Account (IRA) and delay paying taxes on investment earnings until retirement age. If you don't have a retirement plan (or are in a plan and earn less than a certain amount), you can also take a tax deduction for your IRA contributions. IRS Publication 590 contains information about IRAs. You can view or print a copy online at http://www.irs.gov/formspubs/.
7. Don't touch your savings.
Don't dip into your retirement savings. You'll lose principal and interest, and you may lose tax benefits. If you change jobs, roll over your savings directly into an IRA or your new employer's retirement plan.
8. Start now, set goals, and stick to them.
Start early. The sooner you start saving, the more time your money has to grow. Put time on your side. Make retirement saving a high priority. Devise a plan, stick to it, and set goals for yourself. Remember, it's never too late to start. Start saving now, whatever your age.
9. Consider basic investment principles.
How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you'll have saved at retirement. Know how your pension or savings plan is invested. Financial security and knowledge go hand in hand.
10. Ask questions.
These tips should point you in the right direction, but you'll need more information. Talk to your employer, your bank, your union, or a financial advisor. Ask questions and make sure the answers make sense to you. Get practical advice and act now.
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© 2006 |
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University of Arkansas • Division of Agriculture |
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Disclaimer
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