If you're among the majority of Americans saving too little for your later years, rectifying that ASAP is essential to have the financial security you deserve as a retiree.
Unfortunately, it may feel impossible to increase the contributions you're making to retirement accounts -- especially if you don't have a ton of spare cash after covering the essentials. But the good news is, even a small increase in the amount you're putting aside can make a huge difference in the size of your nest egg by the time you're ready to leave the working world.
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An extra $1,000 can have a surprising impact on your retirement accounts
Saving an extra $1,000 a year should be possible for most people, since that amounts to only around $83.33 each month. That's the cost of one or two expensive dinners out.
And if you need the motivation to make that small sacrifice, take a look at the chart below. It shows how much your additional $1,000 annual contribution could turn into, depending on how many years you make it, if you earn an average annual return of 10%.
| Number of Years to Invest an Extra $1,000 | Size of Nest Egg |
|---|---|
| 5 | $6,106.47 |
| 10 | $15,939.38 |
| 15 | $31,775.39 |
| 20 | $57,279.44 |
| 25 | $98,353.96 |
| 30 | $164,504.89 |
Data source: Calculations by author.
As you can see, the sooner you begin investing an extra $1,000, the bigger the impact the additional investment will have in the long run.
Why does an extra $1,000 contribution mean so much?
While an extra $1,000 a year isn't a huge amount of money, it can go a long way toward helping you build wealth, because the money you've invested can earn returns that can then be put to work helping you earn more money.
Even if you just look at the five-year timeline, you'll have put only $5,000 of your money into your portfolio, but you'll end up with over $6,100. The extra $1,106 comes from the returns that you earn. In other words, the money you've invested has made that money for you -- without you having to do anything.
And the longer you have your money work for you, the more powerful the impact this process can have. If you start saving an extra $1,000 a year when you're young and do it for 30 years, you'll have invested just $30,000 extra over time, but that $30,000 will have turned into a whopping $164,504. Your $30,000 will have made you a profit of $134,504. That's money you didn't have to work for but get to enjoy spending.
It's well worth making the effort to put your money to work -- especially when a 10% average return can be easily earned over time by investing in an S&P 500 fund. So now that you've seen what a big impact it can make, why not set a goal to up your savings by $1,000 a year in 2022 and beyond?
