Isn't money meant to be spent? Shouldn't we be able to enjoy our hard earned cash and spend it on a few upgraded luxuries like that new car, a bigger screen tv (just when I thought they couldn't get any bigger…), or that dream vacation?
What's the point in working so hard for money if I can't even enjoy it? We've all been there. Sure, the stresses of working long hours should be rewarded, but often times those short term rewards results in bad long term consequences.
What is the importance of saving money, and why does it matter how much and how soon I start saving? Here's 5 reasons you should have started saving your money 10 years ago, and how you can catch up your savings account progress.
Top 5 Reasons To Save Your Money…Yesterday!
You might be shocked to hear that 58% of American households have less than $1,000 in savings according to GoBankingRates.com. Perhaps a reason for this is because most people may not understand the importance of saving money in the first place, and it's not just so that you can buy your dream car either…
1. Provide Financial Security For Unexpected Events
Having an emergency savings account of at least $1,000 is a fundamental principle to sound personal finances. If $1,000 is too much, start with $500, or even $250 and build it from there.
Why have an emergency fund? The fact is, unexpected events will happen to 100% of us. Events such as unexpected health costs, accidents, vehicle breakdowns, and anything in between can put you years behind on your financial plan. What happens if you don't have an emergency savings account when unexpected events occur?
Chances are you will resort to use debt to finance the expenses, which means you'll spend years paying it off and perhaps unable to finance the next unexpected event…
2. Plan For Retirement
Have you ever thought about how much money you will need to retire comfortably? Consider the following equation to determine how much money you will need to retire at age 65. We'll assume you withdraw 4% of your retirement balance each year in retirement, and you'll need at least 30 years of savings to retire comfortably.
To do this, simply analyze your desired retirement income, and divide that number by 4% (or 0.04) and you get the total savings needed in todays dollars to retire. The table below also assumes you are 30 years old, and will retire at age 65 so you have 35 years until retirement which allows us to calculate the total savings you need annually to reach your retirement savings goal.
|Retirement Income||Withdraw Rate||Total Needed||Years to retire||Annual Savings Needed|
|$ 45,000.00||4%||$ 1,125,000.00||35||$ 32,142.86|
|$ 50,000.00||4%||$ 1,250,000.00||35||$ 35,714.29|
|$ 55,000.00||4%||$ 1,375,000.00||35||$ 39,285.71|
|$ 60,000.00||4%||$ 1,500,000.00||35||$ 42,857.14|
|$ 65,000.00||4%||$ 1,625,000.00||35||$ 46,428.57|
|$ 70,000.00||4%||$ 1,750,000.00||35||$ 50,000.00|
|$ 75,000.00||4%||$ 1,875,000.00||35||$ 53,571.43|
|$ 80,000.00||4%||$ 2,000,000.00||35||$ 57,142.86|
|$ 85,000.00||4%||$ 2,125,000.00||35||$ 60,714.29|
|$ 90,000.00||4%||$ 2,250,000.00||35||$ 64,285.71|
|$ 95,000.00||4%||$ 2,375,000.00||35||$ 67,857.14|
|$ 100,000.00||4%||$ 2,500,000.00||35||$ 71,428.57|
Those numbers may be pretty shocking to some, and to make it even more concerning, is that isn't taking into account inflation. Inflation is estimated to be between 2% – 3% each year, meaning the cost of living increases by 2% – 3% each year which means you will likely need much more than the numbers shown above.
Enough said. If that doesn't show you the importance of saving for retirement, I don't know what will…
3. Save For Home Ownership
Owning your home has major long term benefits both in terms of your style of living, and your overall increase in net worth. Thus, it's important to save your money for down payment on purchasing a home, whether that be a condo, townhome or single family home.
Why is this important? Real estate historically, like the stock market, appreciates in value. That's not to say it doesn't decrease in value either, but over the long run 100% of the time it has increased and returned any down market to continue growing.
Furthermore, when renting a home, you pay your rent and never see your $1,500 rent money again. When you own your home, you make your mortgage payment of say $1,500 and a portion goes towards the loan balance, and the other portion goes towards the interest rate, or cost of the mortgage loan.
Over time, you are building equity, or ownership in the home so when you sell, you will cash out the money you've been paying down all these years. Thus, owning your home is similar to a long term savings account that grows over time!
4. Save For Education Expenses
The cost of education today is only increasing. Furthermore, the need for talented and knowledgeable individuals is also increasing in the workforce. This applies to you whether this means saving for your own education, or for the education of your future children. Some of the most wealthy individuals in the world have adapted a habit of always learning and growing their knowledge.
If you plan on attending higher education yourself, or you plan on having your children attend college, you probably have a pretty good idea of the cost of even local state colleges. A 4 year degree can cost upwards of $30,000 – $40,000 total. Avoiding debt at all costs is only in your best interest to accelerate your future financial health. It's now a fact that student debt has surpassed total credit card debt in the US.
Starting early to save for future educational expenses will provide bigger potential for future opportunities, and if saving for your children's education it can have awesome tax benefits when using a qualified educational savings account like a 529 savings account.
5. Take Advantage of Compound Interest
Imagine if you had saved just 10% of your income for the last 10 years and invested it in the S&P 500 averaging an 8% return. How much money do you think you would have? If you make $50,000 and invested $5,000 per year with an 8% return, after ten years you'd have $76,227.51. That's the power of compound interest.
What is compound interest? It's when you get paid interest on top of interest. If you invest $1,000 and you get a 10% return, you now have $1,100. If you get a 10% return again, you now made 10% on $1,100 instead of $1,000. Its interest upon interest in perpetuity!
The biggest factor of compound interest is time. Thus, the earlier you start saving and investing in the stock market the more exponential growth you will see from compound interest. Here's an even more extreme example to paint the picture of how compound interest can affect your wealth…
If you have just $0.01, and the value of that doubled every single day for 30 days, how much would you have after day 30? To find out, grab a calculator and type in $0.01 and then press the “X” (multiply button) and the number 2 – thirty times. What do you get? $10,737,418.20. When should you start saving and investing? 20 years ago! When's the next best time? Today…
Why We Don't Take Action And Start Saving Now…
The reality is, we all know that saving money is important. Perhaps we didn't have the same viewpoint we now have after considering the above 5 points, but lets be honest, saving money is a basic principle taught even in school so there are no excuses. Why then, don't we save money like we should?
Some of the most common reasons are:
- I don't have enough money
- It's already too late to catch up savings anyways
- I have too much debt to start saving
- I end up spending my savings after a while…
And anything related to the above points. It takes a conscious effort to break a bad habit such as spending, using debt for purchases, etc. Two small changes will take care of most excuses.
First, set up your savings and investment account at a separate bank then your regular checking account. The second is to automate your savings with regular occurring automatic transfers every week, bi-weekly or monthly.
Other popular money and investing apps allow you to round up your daily purchases to the next whole dollar and will save and invest the change for you. After doing this for just a year, I had almost $1,000 saved!
By using these basic tips and tricks to saving on a regular basis, it wont be long before you start feeling even more confident about your finances, and a stressful load will have been lifted from your shoulders.