It's almost better to invest for a few years while you're young and then not save a dime ever again, than to start late and save up all your life. Here's an example:

Sara starts early, then quits

Sara and Bo are friends from college and graduate together at the age of 25. Sara starts saving for her future by putting aside $1,000 a month[1]. Meanwhile, Bo figures it's too early to start saving for retirement and does not.

Ten years pass. When they're both 35, Bo finally decides to start saving and copies Sara's approach: investing $1,000 a month. At the same time, Sara becomes tired of being the good frugal one and stops putting in money, never saving another dime in her lifetime. When does Bo's retirement nest egg finally catch up with Sara's[2]?

At age 55. After 20 years, and after putting in twice as much as Sara did, Bo finally catches up. 

What if Sara doesn't stop investing?

Clearly this is an extreme example, as Sara is unlikely to never save another dime after age 35. If she had continues to save, clearly Bo has no chance of catching up with Sara. The gap between them grows exponentially: what’s more, by age 45 Sara has $251,282 more than Bo, and by age 65 she has $671,824 more than Bo. Sure Sara put in a bit more money, but her extra investment of $120,000 yields an extra nest egg of more than half million dollars ($671,824), all because she started first. 

As tax season comes around and everyone starts make plans around expected IRS tax refunds, it's a small bit of math to keep in mind. 

- Yun Zhang & Bo Lu

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[1] The exact amount doesn't matter for this example, since both people will be putting in the same amount every month. In addition, we're using inflation-adjusted growth here, to remove inflation from the equation. 

[2] We use 5.04% as the annualized inflation-adjusted growth rate (i.e. growth in purchasing power, not nominal dollars). We'll cover the background research for this in a future post. 

Backstory: we called this post "Nonintuitive" because most people don't intuitively think that compounding interest is this powerful. And the names aren't actually made up: they're from my high school economics class eons ago when Sara and I were actually brought up to the front of the room to demonstrate this example. I've never forgotten it since.