“I just don’t have enough money to put toward retirement.”
In the Parable of the Talents, Jesus tells us about a master who gave each of his three slaves some talents, or money, to manage. One received five talents, another received three talents, and the other received one talent.
And it was expected that each should steward well what they have been given.
Many Millennials feel like they are the one holding the single talent. As it relates to money, they don’t have much in their bank account, and while their job provides some income, it isn’t much.
Part of managing your finances well is setting aside some of it for the future. It is preparing for retirement.
But retirement seems so far away for some Millennials. Because of perceived distance, coupled with having little to throw at retirement, Millennials sometimes neglect their retirement.
However, these are prime years for a Millennial’s retirement.
If I could encourage Millennials with one piece of information about retirement investing, hoping that they take that important step of preparing for their future, what would it be?
The power of compounding.
What is compounding?
Compounding occurs when the percentage you earn each year is placed on your principal (the amount you contributed). So the next year, your gain is not just based on the principal, but the total amount of principal and whatever gains you had. Over time, you can see significant growth in your investments.
For example, if you invested $10 and earned 10% over a year, you would earn $1 ($10 x 10%). Now you have $11. But if you earned another 10% the next year, you would not earn $1 but instead $1.10 ($11 x 10%). So after two years you have $12.10.
In a prior post, I shared how a teenager could potentially set themselves up with over $500,000 in retirement before they start college. How did happen? Compounding.
Using the actual returns from the S&P 500 from 1966 to 2015, I created a chart that demonstrated what would happened if a 16-year old decided to set aside $2,000 for three years in a retirement account and just simply achieved the same return as the S&P 500. Here is the result.
If you are a Millennial, you may not have much to contribute to your retirement account. But you do have time. And time allows you to take advantage of compounding.
Leverage time. Don’t miss out on the important years in your retirement. Use the power of compounding to your advantage.