1. The power of time and compound interest
So let's assume you want to retire comfortably by building up an investment portfolio. You better start soon! The longer your wait, the harder it is going to get.
2. The power of time
Let's assume you want to save $1.0 million. Wouldn't that be nice?
Luckily time is on your side since you're 25 years old in this example.
You're willing to invest in risky stocks since you're young, so let's go with a relatively high 7% average rate of return.
Using NumPy's dot pmt() function, you can see that it's still going to require a monthly investment of about 400 dollars per month. Not bad, right?
Now, if you happened to be really unlucky and only earned an average of 5% per year, you would have to be investing 675 dollars to make the same mark. Not great, but still possible if you have a good income, right?
Well, what if you waited another 15 years before saving for retirement?
3. The power of time
Let's say you're in your mid 40's and you only have roughly 25 years until retirement.
Well, you better start saving as much as you can! Time is no longer on your side, and even at a modest 7% rate of return, you're going to need to save over 1200 dollars a month to hit your mark.
If your investments don't turn out great, which has a higher likelihood of happening since you are allowing less time for recovery, you're going to have to save a whopping 1700 dollars per month to hit the same mark.
4. Inflation adjusting
Just for fun, lets assume you already saved 1,000,000 dollars by saving and investing religiously over time. Do you have to invest it to keep up with inflation, or is it already enough to retire?
How much will this money be worth 25 years from now?
As you can see from this example, even 1,000,000 in present dollars dwindles to roughly half of its value 25 years from now due to inflation.
Inflation, poor planning and procrastination cause many people to miss the mark on their retirement savings. Don't let it happen to you!
5. Let's practice!
Now let's try some final examples.