Discover the secrets to building real wealth and financial security.
This post is the second in our five-part series about taking charge of your finances in 2010. Last week I covered the first pillar of personal finance--setting goals. This week we’ll address a topic that you simply can’t build financial security or wealth without--saving money!
Why Save Money?
You may not have control over many aspects of your life, like the economy, the stock market, or the price of real estate, but you do have control over how you spend your money. If you read last week’s post on goal setting, you know that creating a spending plan is the best way to fund your financial goals. A spending plan is simply a map of your expected cash flow. You list all sources of income and decide how that money will be spent, long before you receive it.
Many people have difficulty sticking to their spending plans because they just can’t get a grip on their everyday spending. Or they may view savings as the enemy of having fun and rebel against it. It’s important to realize that when you save, you’re actually spending money on something incredibly important and powerful--financial security. You’ve probably heard the saying “pay yourself first”. That means you should make saving for your current and future needs a priority over other expenses.
I like buying things as much as everyone else. New shoes make me absolutely giddy, but I also know that they can’t pay my bills during retirement! Veering away from your spending plan usually means you’ll save little or nothing at all. That takes you further away from reaching your goals, rather than moving you closer to achieving them. It takes a lot of maturity to know that you have money to buy something that you want, but to decide that you really don’t need it and would be better off saving the money instead.
The quick and dirty tip for saving is to live below your means with a realistic budget that balances your current and future financial needs.
When Should You Start Saving?
If you’re wondering when you should start saving money, the answer to that question is right now! You’re never too young or too far away from goals, such as retirement, owning a home, buying a car, or paying cash for a vacation to put off saving.
An Example of the Importance of Saving Early
Consider this example: Let’s say you have two friends, Terry and Tim, who are twins. They just graduated from college and are doing similar jobs earning about the same amount of money. Terry is fun-loving and always foots the bill for her friends wherever they go. She hasn’t saved a dime since she started working and has even accumulated some credit card debt. She reasons that she’ll earn much more money in about 10 or 15 years, and she’ll pay off her debt and start saving then. Tim, on the other hand, is very concerned about whether he’ll have enough money to retire as early as he’d like. He doesn’t have a retirement plan at work, so he opened up a traditional IRA and started contributing $100 each month to it.
Now, I want you to time travel with me 35 years into the future to see what’s going on when they’re both 60 years old. Besides having wrinkles, gray hair, and needing reading glasses, what happened to their money? Well, Terry did eventually start saving $250 a month or $3,000 per year. She did that for the past 20 years. Tim, on the other hand, only saved $100 a month or $1,200 per year--but he saved that amount for 37 years. For the sake of simplicity, let’s assume that they both invested their savings into a stock ETF in a traditional IRA with a 7% annual rate of return. So how did it turn out?