When I was first learning about money in my early twenties I learned that the historic return on the stock market was approximately 10% (see this article). That doesn’t necessarily mean we can expect those same kind of returns over the next century but it does give us a starting point for making calculations.
So if someone invests $1,000 and gets a 10% annual return that is automatically reinvested, then after year one they will have $1,100, after two you’d have $1,210, year three = 1331, etc. After a decade your $1,000 would be worth $2593.74 which isn’t amazing, but it is more than a 250% Return On Investment (ROI). The returns are a little more impressive after two decades where your $1,000 investment would now be worth $6,727.50 (over 600% ROI), and after three decades it would be worth $17,450. If a 20 year old sophomore in college could somehow find a way to save $1000 and hold onto it until retirement at age 67, they would have a whopping $88,200.
Of course, that is simply following the historical averages, returns could be much lower (or much higher). I think regardless of what happens in the market it would be safe to assume that every dollar saved in your twenties would be worth at least $30 if it was invested in a stock market index fund and saved until retirement in your sixties.
Why does any of that matter?
Well, for me it mattered because it helped me make sound financial decisions. If I know a dollar saved can make a big difference later on it changes the way I think about making frivolous expenditures. For example, yesterday a door-to-door salesman came to my door trying to sell premium meats. He was going to give me a killer deal and knock $100 off the asking price for 50+ lbs or red meat, and throw in the whole chicken package for free. So for a measly $329 I could have enough meat to last me through the football season :). If I can truly afford to make that impulse purchase I can probably also afford to save $329. If I did that and saved it for 30 years I would have $5740 in retirement, which is enough to buy several cows.
So next time you’re tempted to buy something frivolous, ask yourself “is this worth $30 in retirement?”
Tyler is a husband and dad, professor, writer, web designer, and DIYer.
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