Estimating Your Needs for the Future: The 10% Beauty and Beast

We’ve all been told to start saving early and the 10% Rule proves this point. Save 10% of your income and invest it with long term returns around 10%, your portfolio will grow to the point that it can support your lifestyle from earnings in roughly 35-40 years. It doesn’t matter how long you live, you will not outlive your money if you follow this rule.

According to this rule we should all be wealthy and able to financially take care of ourselves well into old age, but that’s not real life. In real life we think that we can’t save either because we earn too little or have plenty of time for that later. Here’s the truth:

You might be young and earning very little, but then 10% of your income is small too. If you earn $22,000 and invest just $183/month ($2,196/year), you’ll be on track. But if you choose to wait until you are older you’ll need to invest much-much more to keep up.

Try it out by using this compound interest calculator.

In the above scenario a 25 year old earning $22,000 and investing $2,196 annually at a return of 10% would have over $1 million at age 65.

This is an easy it is to understand concept, it just seems that most people are reluctant to get started when they’re young.