When it comes to saving money, the younger you start, the better. But saving early doesn’t just mean setting aside a few dollars here and there when you can; it means making smart financial decisions now that will pay off in the future. So how do those savings stack up against waiting until later on in life, when your paycheck is larger? Is it really worth putting money away during your twenties rather than simply waiting for retirement age? While every situation is unique, taking a closer look at potential outcomes of saving early versus putting away money in later years can help clarify which path is right for you. Through an analysis of expenses, investments and other factors specific to your finances.
I was working a night shift last night and was talking to some coworkers about saving early VS save later – it made for an interesting talk at 0200 hours, but I digress.
I love this topic because it’s a big general point this blog stands for! I cannot emphasize enough how important and beneficial it is to your overall wealth to start saving and investing early in life. You are doing yourself a BIG favor later down the road. This is definitely a long-term, delayed gratification strategy that pays dividends.
Story of Two Savers
Review the graph below. I’ve read about a graph similar to this when I read the book, Smart Women Finish Rich by David Bach. I found this infographic on Pinterest but sadly not the source of it. If you happen to know who originally made this graph, I’d be happy to give them credit.
As you can see, Saver B started saving 8 years earlier than Saver A. Saver B then stopped contributing to the account at 25 years old – around the same time that Saver A finally started putting money away. Saver A continues to contribute money in the account for the next 40 years while Saver B lets the money sit in the account with no further contributions. Look at the results when they both reach 65 years old!
In summary, Saver A contributes more money over a longer period of time and still ends up with significantly less than Saver B.
If you can, be Saver B!
Start saving early people no matter what age you are now! Even if you can only come up with $5 or $10 per month to put towards an investment account, that is significantly more than $0. Another benefit is building this great habit of paying yourself first (I do quite like myself a lot!). Building this habit alone far exceeds any amount you DO pay yourself. So every time you put away $5 a month in investments, give yourself a pat in the back because you’re exercising your ‘pay yourself first’ muscle! Then work on increasing the amount as you go along. Baby steps, this ensures a greater chance of success than drastically changing your lifestyle right away.
Okay, now that you (hopefully) understand how important this concept is, what are the next steps?
1. Make your savings a part of your budget.
Every time I make up a budget for the month, I always budget in money for savings. I’m at $258/month now (an increase from $250/month last year). This way, I make sure that I always have money contributed to savings every month no matter how much I end up spending. Then any money left over from my budget is gravy! (Or for debt repayment… in my case, student loans.)
2. Open an investment account (or accounts) to save your money in.
The example above talks about a tax-deferred investment vehicle, this would be an RRSP (Registered Retirement Savings Plan) in Canada.
However, there are other vehicles you can put your money in and make it grow. I’m using my Tax-Free Savings Account (TFSA) to grow my “financial freedom” fund – aka the money I’m going to use to retire myself! My plan is to max this out before putting my money into an RRSP.
My emergency fund is stashed in a savings account with EQ Bank. I don’t want to invest this money in case an emergency comes up and the markets are down – I would be forced to sell low at that point. :/
You need to do your research and understand your risk level when it comes to this. What’s the goal you’re saving for? How much time do you have until you need that money? And then decide where to best put that money. (I’m hoping to write a post to help you with this but you can get an idea of how I did this with my money by reading the following post => Where I Keep My Money)
3. Make saving automatic.
Saving money becomes easier when you have to put less effort into it. My financial advisor has automatic withdrawals set-up from my checking account. All I need to do is make sure the money is sitting there every 22nd of the month. Easy and effortless right? (Learn to be ‘good’ lazy!! It saves you time and effort.)
4. Watch your money grow.
My financial advisor tells me that it’s not about timing the market when it comes to investments, it’s about time in the market. You lower your risk and potentially earn more money the longer you keep your cash invested. When I got started, I worried a lot about the ‘ups and downs’ of my investments and I still do so now, but less than before (progress!). You will probably go through this too when you invest your money! Learn to restrain your emotions. Emotions in investing is a dangerous thing. Look to long-term growth. If you have an investment account that has a strong history and good mix of different assets which suits your investment tendencies, rest in the knowledge that NOT investing is more risky than investing.
I hope this helps drill into your head the importance of saving early and that you start taking actions towards that as soon as possible (read: today would be great!). Creating wealth is really about creating positive habits and taking baby steps. There is no such thing as ‘get rich quick’ and if there is, I would run from it in a heartbeat. Be smart about your money decisions.
Did I mention, start saving early?