Why now ?

"Why now?" you ask ? Two words: "Compound Interest". To understand the power of compounding, lets do another exercise. Think of one of your buddies from undergrad who chose to start working immediately after finishing college. Let us say, for the sake of argument, that you were both 21 when you graduated from college. Suppose, your friend had the financial smarts to sock away $250 every month in a retirement account from the day he started work. Suppose he continued to do so, diligently for 10 years, earning 8% interest compounded annually. At the end of 10 years however, he stops and for the rest of his work life he does not contribute another penny to his retirement account.

Now lets see what you have been upto in this time. Say you spend 2 years on the Master's Degree and another 4 on your Ph.D. Students usually do not have retirement accounts, and lets say you are no different. Moreover, lets assume that you racked up a sizeable amount of debt to pay for your education and a dandy lifestyle. When you finish your Ph.D and start work, suppose it takes you 4 years to pay off this debt, during which time you still do not contribute to a retirement account. At the age of 31 you wake up and start contributing $250 per month, to a retirment account for the rest of your working life, earning the same 8% interest compounded annually, just like your friend had done for the past 10 years.

At 65 both of you retire. Do you know which of you will have more money in the retirment account ? Yes, you guessed it right. Its your friend. Even though he saved only for 10 years, and you did for 34 years, his savings will be higher (around $638,599 while yours will be $510,777). If on the other hand, you did not have that debt and started saving for retirement at the age of 27, your balance would be around $709,417.

Of course this is a completely contrived example. But you get the point right ? The earlier you start saving, the better it is. It is never too soon or too late to start saving money. Here, try for yourself. The bankrate.com calulator allows you to play with different numbers. And I like the visual tool available here for seeing the money grow, especially how the interest can be way more than the pricipal if you start early enough. Hopefully, you will agree with me by now that it is important to start thinking about personal finance as early as possible. As international students, it is likely very difficult to sock away too much. Whats worse, there are few options, if any, for opening retirement accounts. But that doesnt mean we have to give up the financial edge in our quest of academic excellence. I believe, with some awareness and discipline, we can excel in both areas. As a student, the aim should be to prevent getting into debt and hopefully save some to give your finances a kickstart, when you are in a position to sock away more. As a fresh grad, the aim should be to avoid giving in to impulses and the itch to spend, and try and keep as much of all that money that has finally found its way to you.

Click here to read the next post in this series, where we look at setting simple goals to help us get where we want. Or check out the very beginning of this thread.

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1 Comment:

Karen said...

Hi, I like your website. I recently found a good financial resource I thought others might be interested in too. I'm not sure if this has already been covered, but they have a whole program you can work through. It says it's geared towards women, but most of the chapters can be used by either gender. Check out http://wiseupwomen.tamu.edu/