Jul
3
Why You Should Start Saving Money Today
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Start Saving Money Today!
This is the third article in the get money series. In the last article, we talked about how your pile of money is shrinking just by keeping it around and not doing anything with it. It also gave some options for where to put it to keep it from shrinking. This article will explain why we should start saving money as soon as possible.
This is due to compounding, which basically says “the larger your pile of money, the faster it grows”. Let’s assume that you invest your money in an index fund, and that it is growing at 10.9% per year on average, and that there is an inflation rate of 2% per year. Let’s see how many today dollars you would have at the end of each 10 year period:
Year 0: $100
Year 10: $231
Year 20: $650
Year 30: $1230
Year 40: $2840
Year 50: $6555
Keep in mind that these numbers are already inflation adjusted. That means it already assumes you get a 2% raise every single year, and discounts that (so this is less than what you’ll need to make in the dollars you have at that time - a lot less! 50 year non-inflation adjusted would be $17.6k!).
This means that every dollar you make now, you would need to make $2.31 in 10 years, $6.50 in 20 years, … , $65.55 in 50 years. Are your skills in 10 years going to double your salary? Maybe. 65x your salary in 50 years? That’s pretty unlikely. Even if do happen to make 2.31x as much money in 10 years, that’s only how much you have to make to be even with that $1 you’re spending now! If you didn’t spend that $1, that $1 in 10 years, worth $2.31, plus the $2.31 you make then, would be $4.62 that you would have to invest for the 10 years after that, instead of the $2.31.
How Much Should You Save?
Of course, that doesn’t mean you should save every dollar and live on the street right now. A $1 apple today is definiately worth more to you if you’re starving than 65 apples in 50 years. However, if the choice is between a Toyota now or a BMW now, it’s more like “would you like a BMW now or 60 BMWs in 50 years if you take a Toyota now”?
Saving Money Example
In a normal person’s life, their plan is usually the following:
Have fun up to about age 30ish (With job as a source to fund the entertainment)
Get married.
Focus on career while raising a kid for the next 18ish years.
Hopefully have enough money for retirement.
We’ll assume for simplicity’s sake that you make $20k/year (after expenses) while working and 5k/year while playing, with a 2% raise every year. We’ll also assume that you spend the same amount each year (which actually makes the argument below even stronger since your expenses while you’re married are probably higher). If you follow the “schedule” above, starting with say, age 21. That’s 9 years of fun, and 18 years of work. So all in all, at the end of 27 years, you have:
5k*(1.109^27)/1.02^27 + … + 20k*(1.109^18)/1.02^18 + … + 20k = $1.12 million
Now, if you simply switch the order that you do these things in, say work 9 years, then have fun for 9 years, and work another 9 years, then you would have:
20k*(1.109^27)/1.02^27 + … + 5k*(1.109^18)/1.02^18 + … + 20k*(1.109^9)/1.02^9 20k = $1.72 milion
You would have an extra $500k if you just simply delay having fun for 9 years. You’re going to have that fun traveling the world or whatever anyway (if you don’t plan on dying any time soon), so why not just do it later? You’re going to have the do the work anyway, so why not do it earlier? You’ll probably have more fun later anyway since you’ll be more experienced and knowmore ways of having fun. Plus you’ll have more money, so that opens up more expensive options that you wouldn’t have had when you were younger.
A More Likely Saving Money Example
Of course, this is actually an optimistic scenario! Most people, while they’re playing, aren’t making money. It’s more likely that they’re losing $5000/year during the time that they’re playing. Let’s say the interest charged on that money borrowed is 10.9% (just to make things simple).
In that case, you would only have $569k at the end of 27 years while if you reversed this a little and did all your fun in the middle 9 years, you would have $1.42 million! That’s almost 3 times as much money, inflation adjusted! (See Lifetime Money Worksheet)
A Pretty Worse Case Saving Money Example
What if you’re a huge spender, and you decided to get a $50k porsche in year one, and then spent an extra $10k/year? Additonally, assume that you would’ve picked a good hedge fund or invested in some good stocks that gave you 15%/year (and your interest on your loans are also 15%/year). What’s the value for doing that either way? Now, the difference is huge.
Spend first, you will owe $1.176 million 27 years later. Spend in 9 years, you will have an extra $2.52 million, a whopping $3.7 million dollar difference!
Start Saving Money Today?
To me, where I think I may be able to make a even higher % per year, having those extra millions in 27 years sounds a lot better than being in debt, just for waiting a couple years. At that time, there’ll be more cool stuff and I’ll have a better idea of what I want. Plus things might not work out along the way and that extra money will come in handy.
Of course, this is balanced by your perception of how much fun is worth now and how long you’ll live. I would say the expected value of having tens of millions at age 50 + EV of not having fun now & possibly dying before 50 is much, much greater than the expected value of being a broke bum at around 50 + EV of having fun in my 20s. I mean, you’ll probably live another 50 years after age 50. That’s a lot of time to spend being broke. Plus, making money is a lotta fun, and if you make a lot, you’ll tend to be helping a lot of people.
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