Saving money is important, but many of us let other financial obligations come first. We may have credit card debt to deal with, student loans, mortgages, car payments – the list can go on and on. If putting a couple of dollars away each week isn’t the priority it should be, it’s probably because those other expenses seem more immediate. Well, I can tell you from experience, there is nothing more important than making sure your future is secure. Saving even a small amount, $10 a week, just $40 a month, can change your financial life for the better. Having money at your disposal can take the pressure off in an emergency and allow you to take care of your friends, your loved ones, and yourself.
Let’s look at the case of a 20-year-old woman who plans to retire at age 70. She’s only working part-time while she’s still in college, but she budgets carefully and manages to put $10 a week into a basic savings account. By the time she’s 25, even if she does nothing else, she’ll have $2,500 on hand for an emergency. That’s not a ton of money, but it’s a LOT better than having zero dollars in a crisis. By the time she’s 70, she’ll have set aside nearly $30,000 – not enough to retire on, which is still her goal, but every little bit helps, and she’ll be ready for most emergencies.
The reason she’ll fall short is that a typical savings account only earns about 1% in interest, less than the rate of inflation, which is generally around 3%. With that in mind, it’s obvious that saving is only half of any good financial plan. You’re also going to have to invest some of your money if you want it to grow faster. When you invest, you’re putting your money to work for someone else. For instance, if you invest in a company, that organization may be able to expand their operations. If they make good decisions, you may earn a high return on your investment. Of course, if they make poor decisions, you could lose your money. That’s why experts like to see people start saving early. That way, if you make a bad investment early on, you’ll have plenty of time to recover. Financial missteps late in life can have devastating consequences, perhaps even delaying your retirement. To prevent that from happening, most experts recommend transitioning to safer investments as you get older.
There’s no question that investing can be difficult to master. You have to decide where to invest — and when and why. Even people who are careful with their money miscalculate on an investment from time to time – it happens. It’s important that you research your investments, make informed decisions, and learn from your mistakes. You can do research on the Internet, but it might be helpful to download a beginner’s guide to investing, which you can find at Amazon.com for under $10.
Let’s return again to the young woman in our example. What would happen if she split her $40 every month, putting half into a basic savings account and the other half into an investment, like the 401(k) plan offered at her first “real” job after she joins the workforce? By placing $20 a month into a plan with an expected annual rate of return of 8%, she’d save $159,000 over the course of her lifetime – much better than the basic savings account, but still not enough if she’s going to live for another 20 years after she retires.
What else can she do? Well, I hope we can safely assume that she’ll make more in her full-time job than she did working part-time in college, so one thing she can do is contribute a bit more to her 401(k) every month, especially if her company matches her contribution in any way. Beyond that, however, she should consider diversifying her investments by working with a financial professional who will customize an investment plan that meets her goals and fits within her budget. Whether it’s a combination of stocks, bonds, CDs, and annuities, we know we have to help our money earn more than the 1% it’s going to make in our basic savings account. We have to do better.
Even if you’re reluctant to invest right away, you can start saving at any point in your life – after all, something is always better than nothing. So whether you’re 20, 30, 40, or even 50, it can’t hurt to put just $10 a week to work for you. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.