You’ve heard it over and over again: Pay yourself first. Why is this so important? First, it establishes good saving habits. If you continuously pay yourself first, despite whatever is going on in your life at that time, you will be much more likely to achieve your goals.
Second, the power of compounding. Sometimes called the 8th wonder of the world, the power of compounding is truly remarkable. The best way to explain this concept is to show you an example:
Person 1 invests $2,000 per year beginning at age 19 and ending at age 27. Person 2 invests $2,000 per year beginning at age 27 and continues to invest until retirement age. Assuming the same rate of return (10 percent) in each of the two examples, a person who invests early and for just eight years will have more money at 65 years old than will someone who starts late and invests for nearly 40 years.
| Example 1: | Example 2: | |||
| Age | Annual Investment | Year-End Value | Annual Investment | Year-End Value |
| 19 | $ 2,000 | $2,200 | $ 0 | $ 0 |
| 20 | $ 2,000 | $4,620 | $ 0 | $ 0 |
| 21 | $ 2,000 | $7,282 | $ 0 | $ 0 |
| 22 | $ 2,000 | $10,210 | $ 0 | $ 0 |
| 23 | $ 2,000 | $13,431 | $ 0 | $ 0 |
| 24 | $ 2,000 | $ 16,974 | $ 0 | $ 0 |
| 25 | $ 2,000 | $ 20,872 | $ 0 | $ 0 |
| 26 | $ 2,000 | $ 25,159 | $ 0 | $ 0 |
| 27 | $ 0 | $ 27,675 | $2,000 | $2,200 |
| 28 | $ 0 | $ 30,442 | $2,000 | $4,620 |
| 29 | $ 0 | $33,487 | $2,000 | $7,282 |
| 30 | $ 0 | $36,835 | $2,000 | $10,210 |
| 31 | $ 0 | $40,519 | $2,000 | $13,431 |
| 32 | $ 0 | $44,571 | $2,000 | $16,974 |
| 33 | $ 0 | $49,028 | $2,000 | $20,872 |
| 34 | $ 0 | $53,931 | $2,000 | $25,159 |
| 35 | $ 0 | $59,324 | $2,000 | $29,875 |
| 36 | $ 0 | $65,256 | $2,000 | $35,062 |
| 37 | $ 0 | $71,782 | $2,000 | $40,769 |
| 38 | $ 0 | $78,960 | $2,000 | $47,045 |
| 39 | $ 0 | $86,856 | $2,000 | $53,950 |
| 40 | $ 0 | $95,541 | $2,000 | $61,545 |
| 41 | $ 0 | $105,095 | $2,000 | $69,899 |
| 42 | $ 0 | $115,605 | $2,000 | $79,089 |
| 43 | $ 0 | $127,165 | $2,000 | $89,198 |
| 44 | $ 0 | $139,882 | $2,000 | $100,318 |
| 45 | $ 0 | $153,870 | $2,000 | $112,550 |
| 46 | $ 0 | $169,257 | $2,000 | $126,005 |
| 47 | $ 0 | $186,183 | $2,000 | $140,805 |
| 48 | $ 0 | $204,801 | $2,000 | $157,086 |
| 49 | $ 0 | $225,281 | $2,000 | $174,995 |
| 50 | $ 0 | $247,809 | $2,000 | $194,694 |
| 51 | $ 0 | $272,590 | $2,000 | $216,364 |
| 52 | $ 0 | $299,849 | $2,000 | $240,200 |
| 53 | $ 0 | $329,834 | $2,000 | $266,420 |
| 54 | $ 0 | $362,818 | $2,000 | $295,262 |
| 55 | $ 0 | $399,100 | $2,000 | $326,988 |
| 56 | $ 0 | $439,010 | $2,000 | $361,887 |
| 57 | $ 0 | $482,910 | $2,000 | $400,276 |
| 58 | $ 0 | $531,202 | $2,000 | $442,503 |
| 59 | $ 0 | $584,322 | $2,000 | $488,953 |
| 60 | $ 0 | $642,754 | $2,000 | $540,049 |
| 61 | $ 0 | $707,029 | $2,000 | $596,254 |
| 62 | $ 0 | $777,732 | $2,000 | $658,079 |
| 63 | $ 0 | $855,505 | $2,000 | $726,087 |
| 64 | $ 0 | $941,056 | $2,000 | $800,896 |
| 65 | $ 0 | $1,035,161 | $,2000 | $883,185 |
| Less $ invested | ($16,000) | ($78,000) | ||
| $1,019,161 | $805,185 | |||
| Money increased | 64 fold | 10 fold |
Need I say it again? Pay yourself first, and start early!