Christine Romans, CNN chief business correspondent and author of “Smart is the New Rich: Money Guide for Millennials,” uses a Warren Buffett quote to show the power of time when it comes to saving:
“Someone is sitting in the shade today because someone planted a tree a long time ago.”
Think of planting a tree as saving, and the shade it provides later in life as wealth.
As Romans points out, time is key here. A tree takes time to grow, and so does money.
“Investing your savings over time grows wealth,” the author writes.
Romans breaks this concept down into a simple calculation, which she calls the prosperity formula.
Earnings — Spending = Savings
Savings x Time = Wealth
As a real life example of this, the author cites a study done by Fidelity Investments, which studied “the habits of people who earned less than $US150,000 a year but had retirement account balances topping $US1,000,000.”
According to Romans, the people in this study “started saving young, and they socked away a big part of their paychecks.” The author says that they saved 14% of their pay every year, and that’s before any company matches to their retirement contributions.
Romans also highlights the fact that the study participants were willing to take on more risk since they were young. “They weren’t too conservative in their portfolios,” she says. “The younger you are, the more stocks you should own. In fact, on average, they had 70% of their retirement savings in stocks.”
Keep in mind that your portfolio should change as you get older, though. For a breakdown of how much you should have invested in stocks and bonds, take a look at another basic formula.