The opportunity cost of spending today
The power of compounding interest can be understood through the “rule of 72”—i.e. the number of years it takes to double your money is approximately equal to 72 divided by your rate of return. For example, assuming your invested savings compound at a rate of 7%, you would double your money every 10 years.
Especially important for young people, this same rule highlights the opportunity cost associated with spending, rather than saving. That means one dollar spent today would be worth $2 in 10 years, $4 in 20 years, $8 in 30 years, etc.
So if you’re twenty years old, just remember that when you spend $40,000 on that new car, instead of $20,000 on a used one, you’re potentially giving up $160,000 in retirement savings!
