There is no simple formula for saving money and building
wealth. Everyone has different goals, incomes, obligations, and
habits. However, there are a few universal rules to help you get
on the right path. Do you have a savings plan? How much extra
stuff do you buy? Do you save money regularly and consistently?
Just by getting these three questions right, you'll be well on
your way to financial security and stability.
Have a plan
Instead of saying things like "I'm going to start saving more
money" or "This is the year I'll start investing for retirement,"
actually sit down and come up with a plan. I've known so many
people who have said things like this, only to find a couple of
months later that they had made no progress.
When you actually write (or type) a plan, your goal is to hold
yourself accountable. If you write out your savings plan on
paper, put it right on your fridge so you have no choice but to
look at it. If you type it, put it right on your desktop. Force
yourself to look at it often, and it'll help you get into the
habit of saving quicker.
A lot of people make the mistake of not planning
to put their money once they save it. Far too many people keep
all of their extra cash in a savings account, and that pretty
much eliminates the biggest investment weapon you have: time.
Consider that the average savings account pays just 0.07%
interest. Well, the S&P 500 has averaged returns of more than
9% per year over the past 50 years! If you're nervous about
buying stocks, put your money in 30-year Treasuries, which
currently pay about 3.5%.
As an example, let's say you deposit $2,000 per year into an
account over 30 years. In a savings account, you'll end up with
just $60,613, as compared to about $103,000 if you invested in
30-year Treasuries and almost $273,000 for an S&P index fund.
In the chart below, you can see my point about wasting time and
money by using only savings accounts.
Growth of various savings methods over 30 years | Create
Cut out the extra stuff
Personal-finance author David Bach called this the "latte
factor," using the example of how not buying an expensive cup of
coffee every morning could mean hundreds of thousands of dollars
in extra investment returns over your lifetime.
Now, I'm all for treating yourself to some extent, and I don't
necessarily advise following this rule as strictly as Bach
suggests. In fact, I'm drinking my daily
as I type this. What I want to get you thinking about is the
purchases you could live without. Let's take a look at an
Let's say I have an older iPad and I'm thinking about
upgrading to the newest model, which starts at $499. If I decide
to "rough it" with my old iPad and instead invest my $499, take a
look at what it would mean to my portfolio in the 30 years or so
I have left until retirement.
Growth of $499 over 30 years | Create Infographics
So, if you want to go out to dinner this weekend or take a
nice vacation this year, go for it! Just think about what you're
spending money on and if you can do what you want a little
cheaper. By the same logic as the iPad example above, if you
order a $10 sandwich instead of a $20 steak, it could mean $120
more in returns over the next 30 years. Imagine how this could
add up if you chose a cheaper option even once a week!
Don't allow yourself to make excuses
Yes, you can afford to save. If you get in the habit of saving
money every time you get paid, before long you won't even miss
it. Treat it like another fixed expense: $700 goes into rent,
$250 goes into the car payment, and $200 (or whatever amount you
plan for) goes right into savings.
There are plenty of ways to set up automatic savings. Pretty
ages offer automatic recurring deposits from your bank account,
with no minimum. You can deposit $20 per paycheck if you want.
Mutual fund companies have similar automatic investment plans,
and many are willing to waive the minimum opening balance
requirement if you agree to regular deposits, and most offer
target-date funds that lower the riskiness of your investments as
you get closer to retirement.
It's completely fine if you only want to save a small amount
at first while you're getting used to it. If you get paid every
other week and save just $50 out of each paycheck to invest, it
could be worth more than $160,000 in 30 years, assuming 9%
returns. As you progress in your career and can afford a little
more, increase your contributions.
Time is the biggest advantage you have when investing, so it's
very important to get started as soon as possible. So sit down
and come up with a plan for you!
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