I Wish Someone Had Told Me This When I Was Twenty

Throughout the next year, I’m going to review the top 20 lessons learned from Stan in my book “Your Mortgage Matters” (see last chapter for the list). This week we are on lesson #2.

Lesson #2: Spending is Fun, but saving is the key to long term financial success.

Here is a simple fact: The geometric average return of the S&P 500 from 1928 – 2014 was 9.6%. If someone coming out of college saves $500 per month for retirement from the time he is 22 until he is 40, then never pays another penny into his retirement account, while still earning 8%, he will have amassed $1.6 million by the time he is 65. If his friend doesn’t start saving for retirement until she is 40, she will have to save $1,735 per month from the time she is 40 until she turns 65 to amass the same $1.6 million. He put in $108,000 while she put in $520,500. As Albert Einstein quoted, “The eighth wonder of the world is compound interest” – or something like that. The earlier in life we grasp this concept the more rewarding it will be for us.

I realize that the older most people get, the more money we make, and therefore it should be easier to save as we get older. But I would argue that the older someone gets, the more expensive life becomes. Anyone with children would agree with me on that. I also understand the argument exists for someone getting started in life that they have many purchases in front of them (car, clothes, furniture, appliances, etc...) and it is easy to burn through income “getting established”. These arguments are valid. After all, for someone in his early twenties, retirement is so far down the road, it seems irrelevant.

But there is more to think about than just retirement. That is not the only big ticket item that will consume cash. Car purchases, weddings, college and vacations are just a few of the things that “surprise” us when the time comes to pay for them. The only away to avoid going into debt for these things is to save for them ahead of time. I don’t have enough room in this update to mathematically show the damage borrowing for these types of purchases does for someone’s savings efforts. Saving for things ahead of time may mean making some difficult decisions and take some “fun” out of our routine. It may mean something simple like taking the family for a picnic versus taking them to Chili’s. Heck, it might mean taking your lunch to work. And heaven forbid, it might mean driving a car past 100,000 miles. I think I make my point, well, the numbers make the point for me, that having an attitude that puts savings ahead of spending, painful as it can be at times, will allow us to come out ahead financially in the long run.