Power of compounding: Reducing expenses in your 20’s

charlie avatarHave you recently graduated from college or still in your 20's? Did you realize that this age group has the greatest power for compounding? Ya, for every dollar you spend during this time frame you are forgoing extraordinary compounding power. Many people in their twenties, fresh out of college, are more concerned about getting an iPhone, buying a new car, having a deluxe cable package, or drinking it up at the clubs. Saving money is very rarely on the mind of 20-somethings, but don't overlook the power you have. By foregoing your “excessive” expense you can be well on your way to financial freedom by choosing to go without for a few years. Here are a few common expenses that college grads have that show the power of this generation's compounding power.

Savings from age 22 – 30 if you forgo these expenses:

  • Premium Cable/Satellite package– Costs: $89.99/month – 1079.88/year – deprive yourself of the premium satellite package for 8 years and you'd have a cool $290, 276.
  • NFL Satellite package – $360/year. If you'd negate yourself of the lucrative NFL sports package from 22 to 30 you'd save $2880 over those 8 years. That $2880 would grow to $3970  by your 30th birthday, and a measly $91, 562 by retirement age. I don't know about you, but I'd forgo that package for 8 years for $91k.
  • New car – Costs: Average 2009 new car price – $28,400. If you take that same $28,400 and save it for 43 years you'd have $1,342,044! You'd be a millionaire!
  • iPhone – Price of a new iPhone (Apple iPhone 4G – 32GB) $299.99. If you bought the phone when you were 22, but instead invested that $299.99 you'd have $14,176. What if you went into a Apple store and they offered you $14,176 or an iPhone? Which one would you take?
  • Night clubs – $30/week or $1560/year – by not going to the club every week and drinking it up with your friends to the tune of $30/week you could nest $419,315. I'd rather soak it up in a swim up bar in the Cayman Islands with almost a half a million dollars in my pocket. Doesn't sound to shabby does it?

(Assumptions: Investments earn 9% yearly interest & compounded monthly, retirement age is 65)

All these small examples show just how powerful  20-something's compounding power can be. To sum it all up these small examples would save you a total of $2,157,373 by age 65. It's hard to believe the power that young people have on their side if they'd just take advantage of it. Instead we have all these car, credit, tv, and cell phone companies pushing the latest and great needs to recent grads.

Are you a 20-something? What expenses are you doing without and taking advantage of the power of compounding?

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  1. The historical average of the stock market has been 11%, so 9% is definitely achievable over a long period of time with dollar cost averaging over 43 years.

  2. Where can you find 9% interest? or 5% for that matter?

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