There's Still Time

Have you ever seen those personal finance compounding tables, the ones that show how much money you need to save per month to have, say, a million dollars by age 65?

There's a familiar pattern to these charts. If you start saving at age 21 at a given annual rate of return, the required savings might be around $250 a month. If you wait until age 40 to start saving, you'll need to save more like $1,250 a month. And if you wait until very late, say age 50, you'll need to save something like $4,000 a month.

The central idea is this: small steps, begun early and taken consistently, produce impressive results. Likewise, if you skip those small early steps and don't take action, things get hard--very hard--the longer you wait.

There's another sort of sneaky nuance here. $250 a month is a small, hardly-significant amount of money, less than what the average consumer spends on cable, internet and cellphone together. And since it's such a small amount of money, it takes a while to really see any real results of a habit of saving $250 a month--for a long time it simply doesn't add up to all that much capital.

Finally, this habit offers no extrinsic validation, no opportunity for identity construction. It isn't overt or salient to others. Nobody will ever say "Wow, nice looking 250 dollars you saved this month! So hot!" to this young twenty-something. Nobody will notice at all.

However, this 21-year-old is compounding something very important: an intrinsically rewarding habit of regular, disciplined saving and investing. It's just totally invisible to the outside world. For now.

Over time, however, bigger and bigger differences begin to emerge between the person with a disciplined savings habit and the person who never built that discipline. It just takes a while. But at the 15 or 20 year mark, when people reach, say, their late 30s, early 40s, you begin to see enormous differences in peoples' outcomes. The intrinsic becomes extrinsic. And the differences in outcomes spring from vanishingly small initial differences in actions. That $250 a month really does add up, in more ways than you'd think.

Okay. This post isn't really about retirement savings, it's broader than that. So let's stretch this concept a little.

Which of your peers "compounded" a few pounds of body weight per year? And at what point were you really able to see the results? A few pounds of new body weight a year is nearly invisible on a person in his 20s, starts to be gently visible in his 30s…. and then, seemingly all of a sudden, this person is 80-100 pounds overweight by age 45.

Which of your friends or peers compounded in terms of lifestyle inflation? Which didn't? Which of your friends or peers compounded a habit of reading widely, or a habit of lifelong learning? Which of your peers anti-compounded intellectually by watching a ton of television?

Yet again, in your 20s, you simply can't see all that much of a difference between the compounders and the anti-compounders. No, wait: it's worse than that. In the short run, the rewards tend to sit on the wrong side of the ledger! Early on in the game, the lifestyle compounders and the non-savers get to drive slightly nicer cars and eat out more often. The heavy TV watchers seem more hip and trendy and know more shows.

But these small, insignificant-seeming consumption, behavioral and habit differences compound--no, they explode--into something substantial in the long run. And it really begins to show itself in the late 30s and 40s--the age I'm at right now. It's heavy.

Admittedly, I've done better in some life domains and much worse in others. I suspect most of us can say the same.

One last point. I'm sure by now most readers "get" this post's general metaphor on compounding: take little steps, build a habit, be patient, blah blah blah.

For those readers in their late 30s, their 40s--even their 50s--who are thinking "But I'm not in my 20s anymore. It's too late for me to capture the benefits of compounding!" I have a question for you: Do you expect to be alive fifteen, twenty, even thirty years from now? Exactly.


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