Editor’s Note: While reading about how hard saving can be, keep in mind a few of our favorite tools to make it easier. This app has changed the way I view my spending habits, this book made it easier for me to spend less, and this budgeting journal helped me get it down on paper. The Minimalist Budget has been getting rave, reviews too.
Most of us have heard that we are supposed to start saving for our future early on, but few of us understand why. I know it may seem like you need that skinny grande hazelnut latte each morning or
cannot live without that one really beautiful dress immediately, but you might want to rethink your spending habits. Believe it or not, thinking long term when it comes to savings will pay off (you see what I did there?!) and I bet you could even whip your own homemade latte at home (but that’s a post for a different day). And why would you want to make those changes? Well in order to be able to put money away for a luxury SUV in the future, of course! (Only a little kidding).
The secret is compound interest. Interest is a seemingly too complicated term that only bankers and
the those pesky student loans understand, right? Wrong. It is possible to understand it, too. Interest is the simply the percent of your money that is added to the original sum (or principle). Bad news when it’s your loans, great news when it’s your savings for retirement or a swanky vacation. So compound interest is a percent of your money that you invested grows at an increasing rate every year.
This may be hard to picture, so here is an illustration courtesy of CNN Money: At the age of 25, you invest $250 per month in a retirement account until you reach 35 and then you quit adding any money to this account. When you are ready to retire at the age of 65, your money was working just as hard as you were. Your $30,000 savings grew to $338,000.
Now your friend, saw that you were putting money away for later and started her saving at the age of 35. She put away the same amount of money ($250 per month) but for 30 years. When she retires her $90,000 saving will only have earned $303,000.
So now that we see the importance of investing early, what are things you can do now to ensure a financially secure future?
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Cut down your spending on little extras and put the money you save into a savings account. Cutting back on one latte a week will leave you with $20 extra a month and $140 a year! Even if you don’t have enough saved to start investing in portfolios or that just sounds too daunting, you will be glad you built yourself a little cushion for the unexpected flat tire or when you favorite band comes back on tour (looking at you Dixie Chicks).
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Talk to a financial advisor. They will help you wisely invest whatever you have saved so you can start letting your money earn some money. A lot of banks where you might already have a
checking and/or savings account offer financial advisors to talk to you for free. And while they might try to convince you to invest where they tell you to, you can use it as a suggestion.
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If you are employed full-time, talk to your employer about a 401(k) which is a common type of retirement plan. Many employers match whatever percent of your salary you put away, so putting away as much as you can as early as you can really helps you in the long run. And if they do offer it, opt-in. Think long term!
Sources that helped me:
Why Should I Start Saving for Retirement?
Hillary is a grad student living in Indiana. She loves the Midwest, dancing, and laughing a lot. She is self-taught when it comes to money management and finance and has a passion for sharing her knowledge about it. On any given day you can find her snuggling her pup and drinking a strong cup of coffee! You can follow along with her on instagram and twitter at @Hillzy10.