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March 11th, 2013 | Forbes

Savings: Start Early

In The Snowball: Warren Buffett and the Business of Life, biographer Alice Schroeder relates how the legendary investor from Omaha had an epiphany one day when he was 11 years old. Buffett picked a book entitled One Thousand Ways to Make $1,000 off the shelf of the local public library and read a passage that explained the concept and math of compound interest. Schroeder writes: “He could picture the numbers compounding as vividly as the way a snowball grew when he rolled it across the lawn.”

I’m reminded of this anecdote as I read a steady stream of media reports that describe how a majority of working Americans are not saving (and investing) enough of their income to maintain their standard of living in retirement. Mere mortals are not wired like Warren Buffett, but unfortunately even many adult Americans do not seem to comprehend compound interest, which is what Albert Einstein called the “eighth wonder of the world.” The physicist added: “He who understands it [compound interest], earns it…he who doesn’t…pays it.” I’ll provide a vivid example of the importance of saving soon and saving often, but before that let me briefly summarize the lamentable findings of a few recent national savings studies.

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