I spoke to my grandmother last week (she reads the blog on her snazzy new computer she just got) and she told me the advice her boss gave to her many years ago.
He said that before you pay the bills and before you go spending your paycheck, pay yourself first. Put 10% aside and then go pay the rent, utilities, etc.
I’ve heard this advice a million times on various blogs, but as much as people come up with creative ways to save a few bucks on taxes or search the weekly circular to save a few cents on pasta, nothing can replace the best way of saving and making sure we have enough money in the future.
Sure, you may make more in the future as you get a better job and more opportunities open up, but saving now can have a lasting impact. There is always enough to put a little something away. Even if you think that money won’t make much of a difference, it definitely will.
I’ve seen this graph several times, but for those who haven’t seen it, look at how much of a different putting money aside now is compared to waiting.
Taking a look at the numbers, it’s astounding how much of a difference paying yourself first makes. Consider this example:
Alex is 25 and saves $5,000 a year for 10 years, and after 10 years, has a cool $73,000 in his bank account from his $50,000 in contributions. Then he doesn’t contribute another cent until retirement.
John is 25 but decides that he’ll be able to make up the difference later. he waits 10 years, then contributes $5,000 a year for the next 30 years, for a total of $150,000 in contributions.
Who do you think has more money at age 65?
Despite contributing 3 times as much as Alex, John has about $55,000 less at retirement, assuming a 7% return on investment.
And what happens when Alex doesn’t stop saving at age 35, but keeps investing $5,000 a year for 30 more years? He ends up having over twice as much as John. Can you believe that those ten years delaying cost John over $600,000?
There really is no replacement for saving. As you get older and make more money, you will also have more responsibilities and saving will be just as hard. So do yourself a favor: start saving TODAY by making your “pay yourself first” bill more important than than the rest, and you’ll be doing yourself a half a million dollar favor.