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Over the years, the power of compound interest can turn your savings and investments into a sizable nest egg.
The length of time that you stay invested is extremely important.
Contrary to some beliefs, decreasing that period by a year results in the loss of the potential gains in the last compounding year, not the first.
This takes a big chunk out of the balance because the compounding periods at the end are the most valuable.
You can test this in the utility below.
Show Calculations
| Age | Beginning Balance | Interest | Savings | Ending Balance |
|---|---|---|---|---|
| {{ row.age }} | {{ row.beginningBalance }} | {{ row.interest }} | {{ row.savings }} | {{ row.endingBalance }} |
You can spend your income in a way that benefits you in the long run by focusing on the more important priorities first.
Those are the ones that would give you the maximum benefits for your money, such as building up an ample emergency fund (6 months of expenses), taking advantage of free money such as a company 401(k) match, minimizing interest payments by eliminating high-interest debt, and contributing to tax-deferred retirement accounts before contributing to taxable ones.
Based on the flowchart from Reddit.
Pay essential expenses and try to reduce them.
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Contribute {{ emergencyFundContributions }} to your emergency fund.
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Contribute {{ company401kMatchContributions }} to your 401(k) for your company match.
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Pay off {{ debtContributions }} of your debt, starting with the highest interest loans.
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Contribute {{ company401kContributions }} to your 401(k).
Your savings rate is the most important factor in determining how early you can retire, not the rate of return on your investments.
This is because increasing your savings rate has a double effect: it increases your retirement savings quicker AND it permanently reduces your expenses, allowing you to retire on less savings.
Notice the dramatic decrease in the years to retirement when a low savings rate is increased.
Based on the article from Mr. Money Mustache.