You’d be furious if the government suddenly increased taxes by 20%. I’m sure I would. I’m now spending all of my money to meet costs, save for the future, and maintain a respectable standard of living. While coughing up extra 20% would be a pain, I’d work it out.. We all would. It’s an reflection of our resilience.
If you are someone who is struggling to save, or just is not trying at all, I encourage you to look at it much the same way.
Saving is Non Negotiable To Make Sure Your Future doesn’t Suck
Way too many seniors are barely getting by financially. Rising debt levels, booming housing costs, expensive medical care and inadequate savings are restricting our seniors to merely existing instead of thriving in a time when their life should be filled with joy and opportunity. We’re going to be seniors too, and I do not want this to be the reality for you or I. We could easily be the struggling ones unless we do something about it now.
Saving money is vital and has an impact on all of us. To deal with unexpected expenses, it’s a good idea to have a three-month net income reserve or more.
Why You Need to Start Saving Now
As long as your salary is enough to live on and you can fly on vacation every now and then or afford nice things, you don’t need to save any money, right? Wrong. Because most people recognize how vital it is to have some money on the side when their car breaks down or there is some medical emergency.
This moment in time is your single biggest opportunity to set yourself up for a strong future. It’s not about how much MONEY you make, it’s about how much TIME you have for it to compound. This is key. This doesn’t mean you don’t have to worry about saving now, because you do.
Read also: The Simplest Budget/Savings Plan Ever!
Compound Interest refers to the interest earned on interest earned. Invest $10,000 and earn 5% – you’ve got $10,500 after a year. But earn another 5%, and you’ve got $10,525 after year 2. You haven’t added anything extra of your own money, yet it’s earning you even more. It’s not magic, it’s math, and it can get CRAZY BIG after many years of contributions and compounding.
Starting now will deliver you the highest returns. The returns on a 30 year investment humiliate the 29 year one. Have you started saving for the long term? If not, do it now. Set up a TFSA or RRSP (or both). Set an automatic transfer from your bank account to take place on every payday. Minimum of 10% of your paycheque, but more if you can muster it. You’ll be fine without it, and after a few pays, you’ll hardly remember it.
Saving vs. Planned Spending
Saving is a pillar of good budgeting, but be sure not to confuse it with Planned Spending. Pocketing money for a trip, or your next car is Planned Spending, because will eventually be spent and can no longer compound. Planned Spending is also an important part of any good budget. But Saving is about accumulating wealth over the long term, building your net worth, and funding a future when you will no longer have a job to pay the bills. Saving accounts are not to be raided for anything other than retirement.
Saving vs. Paying Off Debt
People often struggle with the duality of this one. Why save over here, when I owe over there? In many ways, I agree. It doesn’t make sense to save and earn 5-6% on an investment while sitting on a student loan costing 6%, or a credit card balance costing you 19.5%! (PS. If you have a credit card balance right now, cut up the card, and make paying it off your #1 priority!)
The most important thing is that you establish the habit of saving. Don’t sweat it if you can only muster $50 a month. After adjusting for inflation, that $50 is worth $162 in 30 years. Over time, as you reduce your debt and earn more money, you can increase your savings amount then. It’s important to know that you can’t touch this cash until retirement, so don’t raid it to buy a home, or take a trip. It stays put so it can go to work and earn interest for your future.
Did someone say Early Retirement?
Depending on how much you save, and how long it compounds, this could be a very real option for you. Think about dragging yourself out of bed every morning and asking how much longer you have to keep working. It sucks. Now imagine if you’re nearing the end of your career. Your peers start retiring around you, you’ve achieved everything you’d hoped to in your profession, and you’re eager to embrace more freedom. Padded retirement accounts give you options. Your future self could either be grateful for your wisdom and saving efforts of your current years, OR your future self may be full of bitterness and regret as they face years of discontent chained to a job. I can’t predict how I’ll feel at that time, but I want to make sure I don’t limit my options.
Retirement Age is Coming Whether You’re Ready or Not
Time is also the one resource we can never get back. You will reach retirement age someday, in a finite amount of time. This actually makes planning pretty simple. You could do nothing to prepare, and then scramble and feel regret for not making it a priority of your past. You may even have to keep working just to get by day to day.
You have the option to start saving later, but then you not only miss out on the full benefits of compounding, you’ll also have to fork over more money to reach retirement readiness. Financial experts, say you could start saving as little as 6% starting in your 20s and be fine. But wait until your 40s, and you’ll need closer to 20%. It’s a hell of a lot easier to save 6% than 20%, so it’s your call.