In two previous posts I illustrated the value of investing early and often.  Specifically, the earlier you start an investment plan, the more time it has to compound and grow into wealth.  More obviously, the more that is invested, the more there is to grow.  This illustration also demonstrates the power of compounding, by showing the difference between averaging a 7% rate of return over a long period of time, versus achieving a 10% rate of return.  The point is not to suggest that these rates of return represent two specific asset classes.  It merely shows how dramatically a 3% difference in average returns affects a long-term investment plan.  We’ll build on these themes in future posts when we discuss appropriate levels of risk.

According to a nationwide survey that has just been released by CareerBuilder, 61% of workers always or usually live paycheck to paycheck.  What is more astounding to me is that the figure was 49% last year and 43% in 2007.  That is a tremendous change in two years.  Even 30% of six-figure earners live in this manner.

It’s not surprising that more people have been forced to manage in this fashion given the recent economy, but the magnitude of that change is significant.  Our aggregate savings rate in the US has increased over the past couple of years.  No doubt, interest rate resets on mortgages and credit cards have played a role.

Regardless of the reasons for this shift, it is important to note that living without a financial safety net is a pretty dicey way to manage personal finances.  Unemployment is high and may continue to rise for a little while.  Maintaining an emergency fund is critical to financial well-being, even in prosperous times for the general economy.  For some thoughts on building an emergency fund, review my Keep it simple blog post from February.