Ever had or heard of friendship bread? Basically, someone makes a “starter” with flour, yeast, and sugar. The starter ferments (sounds gross) over the week. Then you add some flour, sugar, and milk to it. At that point, you can then separate the batter into 4 different bags plus one cup to make some bread. You keep one bag for yourself, and you give the rest away.

The recipients of your bag, then keep it for a week. Then add some flour, sugar, and milk to it. After a week, they take the new starter and split it into 4 different bags again, plus make a loaf of bread. They keep one bag for themselves and then give the other three bags away.

After just 20 days, your one bag of starter has gone to make 4 different loafs of bread (strong assumption: each person keeps making and giving out the bread):

Day 0: Make Starter

Day 10: Make 1 Loaf of Bread, give or keep 4 starter bags

Day 20: You and friends make 4 Loaves from the 4 starter bags, give or keep 16 starter bags

Day 30: You, your friends, and your friends' friends make 16 Loaves from the 16 starter bags, give or keep 64 starter bags

Day 40: You, your friends, your friends' friends, and your friends' friends' friends make 64 Loaves from the 64 starter bags, give or keep 256 starter bags

…

Day 100: Total of 262,144 Loaves, give or keep 1,048,567 starter bags.

If every bag that is given out from friend to friend is made into loaves of bread, that one starter bag then made over 262,000 loaves of bread by Day 100.

Now, for the sake of our example, let’s say you waited until Day 60 to start this 10 day process of making and giving bread. Instead of having 262,000 loaves, your starter would have just made 256 loaves of bread by Day 100. That is a lot less than 262,000. Even if you started with 2 starters instead of 1 starter on Day 60, you would still just have 512 loaves. Again, a lot less than 262K. All because you started later.

Why? Well it’s not that each loaf didn’t expand at the same rate. It’s just that there wasn’t enough time for it to grow.

The same lesson applies to saving for retirement and a concept called compounding interest. Let’s say you put some money in the bank. At the end of the year, you will have that same amount of money plus any interest you earn on it. Over that second year, then, you will earn interest on both the $100 you originally put in AND the interest you earned that first year.

(Assume 5% interest each year):

$100 -> $105 (= $100 + $100 * 0.05) -> $110.25 (= $105 + 105 * 0.05) -> 115.76 …

If you invested this $100 at the age of 20, after 45 years (end of age 65) that $100 would be $898.50. And, unlike the friendship bread, you didn’t have to add anything to it each month or year to get there.

While it is pretty cool that the $100 at the age of 20 will be almost $900 at the age of 65, it would be wise to continue saving each year. If you save $100 each year from the age of 20 to the age of 65 (and again assuming an interest of 5%), then you would have $16,868.52 at the age of 65 – even though you only put in $4,600 in cash.

If – instead – you had waited until the age of 40 to start investing $100 each year, you would have only $5,111 by the age of 65. To make it even clearer, let’s say instead of investing $100 at the age of 40, you started investing $200 each year from the age of 40 to 65, you would have only $10,223 at the age of 65. In that case, you actually put MORE into your retirement but still came out with less.

It all comes down to the beauty of compounding interest – earning interest on the interest that you earned. Assuming that 5% return...

Save $100 each year from the age of 20 to 65 --> $16,868 after the age of 65

Save $100 each year from the age of 40 to 65 --> $5,111 after the age of 65

Save $200 each year from the age of 40 to 65 --> $10,222 after the age of 65

Basically, the earlier you start to save the better. Just as the earlier you start to make Friendship Bread, the better.

*** Now, where did 5% come from? I made it up. It’s not completely out of the blue, but it does depend on where you are investing.

You could put your money in a savings account. Right now, that would give you an interest rate of less than 1% per year.

You can put your money in the stock market. Following the S&P500 has given an AVERAGE earnings of 10% over the last 20 years. Now, some years it would be less. Some years it would be much more. On average, though, you earn 10% on everything in the account – including the interest you earned in the previous year(s) and not considering inflation. Here is the excel sheet I used for my calculations. You can adjust with different savings and interest rates. For an easier calculator, you can go to the SEC compounding interest calculator.

However, when thinking about retirement, you need to consider not only the interest you earn but the inflation. For more on that, let’s head to this post.

Friendship Bread

I have received Friendship Bread starter once. I made one loaf and threw the rest of the starter away. I have no patience / desire to maintain a starter weekly (I'm just being honest). Probably similar to my inability to keep house plants... I even kill the succulents which are supposed to live forever.

But! If you want to try, here is the recipe I followed. I'll make the loaf of bread this week and update with how it turned out!

Update: I made the bread! I followed Tastes of Lizzy T's Friendship Bread Recipe (original author was a Julie Clark). I made a classic mistake of not reading all of the ingredients before starting and mid-way through I realized I did not have vanilla pudding. So, I improvised and made it a chocolate bread! I replaced the vanilla pudding with chocolate pudding and then added some chocolate chips. Yum! The bread has a different texture, as it's both a quick bread and a yeasted bread combined into one. But, it is delicious hot from the oven with some butter!