Habit & Compounding
My grandfather frequently told me “You can’t learn it any younger!” And so, it is with saving.The sooner you start, the more you will have because of two very powerful forces; Habit & Compounding.
Have you heard me tell the seed story? If not, it’s because we are just beginning our journey together. If you have, you know how impactful the story is.
When I was a young man, a mentor friend of mine gave me an important demonstration on the power of a seed. He held out an apple in his hand and asked me what it was and what it could be. I replied, “It is an apple. And… I guess it could be, a snack, a pie, maybe applesauce, or cider. Is that what you mean?” “What else could this be?” he asked. Not sure where he was going with this; I said, “Well, I guess it could be anything made from apples.” He looked at me with big excited eyes for a moment. Then, he turned, pointed out the window, and said, “Look. the seeds in this here apple can be that whole apple orchard right there. In fact, when I was a boy your age, that is all it was. A few seeds from a few apples and now look at it!”
Why is this important?
Unfortunately, saving is often not as easy as it sounds. Getting started can be the hardest part. Let me repeat that- Getting started, can be the hardest part. Subsequently, you may not feel like you are saving a lot. You may get yourself feeling discouraged. You may think to yourself, “what difference can $20 a week make?” But over time, it will make a massive difference.
Compound Effect
Starting at age 20 with only a 6% average rate of return will yield you more the 2.5x more in your account at the age of 65 than if you wait until age 35 to start.
Saving Habit
When you are used to saving, it becomes a habit and little by little, you can increase your contributions. Soon, you will not even notice it’s gone.
The Rule
Section 105. Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes
Stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions. The legislation removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes. The change will enable these students to begin saving for retirement and accumulate tax-favored retirement savings.
This is great news to benefit from the long term effects of compound interest. It may not seem like a lot in a student’s budget, but the early seeds are the ones that produce the most fruit. And it is rewarding to have some skin in the game early.
