Last year, I signed up for a program called "Connections" through my alma mater. The program is designed to bring a group of the college's current juniors and seniors together for a pow-wow with both recent graduates and ancient grads like myself, who work in the students' prospective career fields.
On the day of the confab, a handful of us alumni sat on the dais, facing a dozen fresh-faced undergrads. After we alums painted a verbal picture for the kids of the work world we inhabit on a daily basis, it was time for the question-and-answer session. It took a while, but then one student held up her hand and asked, "What do you wish you knew when you were our age that you know now?"
It was the question I'd waited for, the one I hoped would allow me to make a significant contribution to the collective joy of the student group -- not then, but four to five decades in the future. My response applied more to life than to a career. But when I got handed my sheepskin with the rest of the Class of 1976, I wish I'd known this above all: I wish I'd known that my youth was a tool -- a priceless instrument of wealth accumulation that I could leverage to accumulate vast financial assets with little effort. It took me a dozen years after graduation to grasp that lesson, and even that late in the game I still managed to parlay the wisdom into a tidy sum. But I can only imagine what I would have been able to accomplish had I been hip to this truth a decade earlier.
Off 180 degrees
Most college grads leave academia with a view of the future stretching to infinity. It's so far off they can't imagine the age of 40, let alone their retirement years. Having spent 17 years -- almost their entire lives -- toiling away in the classroom to reach college graduate status, they're convinced of one thing: They can wait to start saving for the astronomically distant day when they retire. For right now, it's time to reward themselves for all that work by spending, not saving.
That assumption is exactly 180 degrees off. That's because the most important, powerful savings young people will ever put away are the savings they bank the very first day they are paid. The second-most powerful savings? The savings banked the day after that.
By the time paychecks are handed to people in their 50s or even their fairly youthful 40s, the savings-growing power those folks once enjoyed has been sapped. There are fewer years left until they retire or are forced to leave the workforce.
That means there are fewer years for savings to compound. Compounding has an amazing way of growing savings over long periods.
As Albert Einstein put it, "Compound interest is the Eighth Wonder of the World. He who understands it earns it. ... He who doesn't ... pays it.
If you put savings into a tax-advantaged account, such as a 401(k) offered by your employer or an Individual Retirement Account, then you'll have the Eighth Wonder of the World on steroids. Not only is your principal earning interest every year, but your interest is making interest, as are your reinvested dividends.
Furthermore, in a tax-privileged account, those gains are not taxed year to year, so they grow at an even faster clip. Wait even one paycheck to start saving, and the most powerful two-week period you'll ever have to save has been wasted. Think two weeks of savings probably won't amount to much? Try compounding them in a tax-deferred savings vehicle for 45 years, and you may reassess that notion.
A few years ago, a study looked at two groups of savers. One group started saving at age 25, saved a given amount of money each year until age 35, and never saved again. They simply let those savings grow through the power of compounding.
A second group of savers started the day after the first group stopped saving. Starting at age 35, they saved the same amount of money each year for not 10 years, but 30 years, all the way to the traditional retirement age of 65.
Which group came out ahead at 65? That's right: the first group. The fact that they saved earlier more than compensated for the fact that they saved much less.
If you're starting off fresh from college, you too have a priceless tool at your disposal. No, it's not 0% balance transfer credit cards or knowing how to save on car insurance. It's compound interest. Don't leave that tool in the closet until you're middle-aged. Use it from the very first day, when it has the most power.
After leveraging Einstein's Eighth Wonder of the World for four or five decades, you just might be able to take the rest of your life off, perhaps taking some time to visit the original seven.
This article originally appeared on FiveCentNickel.
Compound interest and the two most powerful days you will ever have: