[
Saving money is extremely important for young people. Ron Redfield, CPA, PFS, shows the power of compound interest on saving money, with examples of saving money now, instead of years later.
Full Article - Table of Contents
Question by Steve Kobrin: Ron, my father has always preached the virtue of goal-setting, namely "plan your work, and work your plan." Tell us how this relates to personal finance. How important is it to use a personal financial planning sample, as a guide to personal financial planning, in general—in terms of personal goals for saving money—such as for retirement planning, for example?
Answer by Ron Redfield (continued):
Saving money—especially early on—is an important goal in many personal finance plans. For example, let's consider a single male, 25 years old, who hopes to eventually get married and have a family.
In this example it would be most important for this person to set specific general goals. One goal would be to contact a life insurance professional and determine the need for life insurance and perhaps disability insurance.
By the same token, this person needs to realize that the need for saving money in the future should start now as well. The ability of saving money for the future is crucial at this stage of his life for several reasons. One reason would be to instill the habit of saving money.
Another reason would be to take advantage of the power of compounding of interest. Here is an interesting example. A person saves $200 per month and, over the course of time, earns a hypothetical annual rate of return of 8.00%.
Using this example, the person starts saving money at age 25. By the time he is age 70, he would have accumulated $1,054,908. Had the same person started saving money at age 35, he would have accumulated $458,776, by age 70. The difference of a mere 10 years would be $596,132. The natural power of compounding is incredible.
Did you know that legend has it that Albert Einstein said that compounding was the world's greatest invention?
I mentioned, above, that this young person's goals would be general goals. At this point in his life, detailed goals would not be required. After all, he doesn't yet know his future spouse's needs, wealth, earning power, etc. Perhaps this person still lives at home, or he is still thinking of starting a career.
Yet, this person should start thinking about goals (as well as start saving money), and he should lay out his goals in a written, informal plan. As the years go by, and as his needs for saving money become more obvious, he can formulate those informal goals into formal structured goals.
Next, let's look at a married couple that is thinking about retirement planning.
Ronald R. Redfield, CPA, PFS, is available for a free consultation and sample portfolio based on your investment risk tolerance levels. And you're warmly invited to request a complementary copy of Ron's text on investment philosophy.
Please contact Ron by visiting him at Redfield, Blonsky & Co., sending him an email, or calling him at 1 (908) 276-7226. Be sure and read Ron's latest commentary on financial investments, to keep up with market changes.