The Urgency of Saving Now

Sometimes it is easy to get overwhelmed by the big picture of financial independence. There are so many topics, nuances, and optimizations to be had. So, I thought it would be a good idea to write down small bits of the overall picture, and the lessons I have learned on each group. The first pillar of early retirement is savings. Therefore, it is important to discuss the urgency of saving, now.

Let’s take a look at two individuals, and their potential to create wealth. Mr FeelRich, and Mr. IsRich. Mr. FeelRich works at a fancy white-collar job, reels in a tidy $100,000 salary and saves 10% of his salary. That means he is setting aside $10,000 per year for retirement. Mr. IsRich however, lives a more conservative life-style and makes half of what Mr. FeelRich makes ($50,000). Because of the way Mr. IsRich lives, he is able to comfortably stow away $12,000 per year for retirement, or 24% of his salary. Each of these individuals continue saving at the same rate for two decades. You would imagine that the two men would be roughly $40,000 apart in their retirement accounts. However, compound interest plays a HUGE role in this. The long term average annual return of the S&P500 is 11.72%, by adjusting for inflation, that means the long-term average is around 8% (long term average inflation is 3.22%).

As you can see, compound interest gave Mr. IsRich over $51,000 MORE just in interest. Let’s look at one more example – Mr. Chunk and Mr. Payment. Mr. Chunk chooses to place $20,000 into an account immediately, but then never places another penny into that investment account. Mr. Payment, however chooses to pay $1,500 per year into an account (for a total of $30,000 principal in the account).  Who do you think has more after 20 years?

Even though Mr. Payment contributed 50% more principal, Mr. Chunk has $18,000 more. This is why every single decision to save money NOW is worth more than a decision to save money later. Do not procrastinate on this, make compound interest and time your hard working friends.

2 Comments

  1. Trevor Monnier

    I found that I can save $300 by not having my kids vaccinated for hepatitis. That means I can earn a return on that money in order to retire early. Mr. Sprout, what do you recommend?

    Reply
    1. Mr. Getaway (Post author)

      Trevor,
      The debate around vaccinations for children is on-going. Some people choose not to vaccinate their children for religious reasons, or due to government conspiracy theories. Others believe that choosing to not vaccinate your child is an ill-advised choice. As for me and my family, our son receives all of the state recommended vaccinations. When choosing to make a new decision to save money, there are a few questions my wife and I tend to ask. First, does this new decision hamper the quality of life for our family? Second, does it add new risk to our lives? Third, will we be happier? Let me give you an example from our own lives. My wife and I used to have our phone service with Sprint (and paid $120 / mo. at the time). Since then we switched to Republic Wireless, and now pay $27 / mo. To be honest, we didn’t really even notice a difference. We have unlimited talk and text, and our phones are just as smart as ever. It can be easy to get caught up in the urgency of saving now, and to thereby give up things that keep our family safe. The real challenge of saving is to increase your savings while not taking on additional risk, and not giving up things that are important to you and your family.
      In direct response to your question, I will ask a few questions:
      1.) Is saving $300 worth the potential risk that your kids contract Hepatitis in the future?
      2.) Could you save $300 (or more) by changing something else in your life?
      3.) Will not having the Hepatitis vaccination improve the quality of life for your children?

      Reply

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