Do you want to be financially better off throughout your life? The secret is not as simple as it sounds: begin saving when you’re young.
While it may not be easy to do, if you start putting money aside in your twenties (or even as a teen), you’ll develop good personal finance habits, as well as a better understanding of money.
Teenagers who put a portion of their part-time earnings into a savings account typically learn:
the value of money
how to live within their means
the importance of budgeting
to make better money decisions
the habit of setting short- and long-term financial goals
3 Persuasive Reasons To Begin Saving When You’re Young
#1 The Power of Compounding
Compounding interest is a powerful thing. If you’re 25 years old, save $100 each month, and earn average interest of 8%, by the time you’re 65 you’ll have more than $300,000.
Waiting until you’re 40 to start saving makes the process of building a nest egg more challenging. At age 40, you’ll need savings of $360 each month earning 8% interest to earn the same amount by the time you’re 65.
I often use the Rule of 72 to give my clients a quick snapshot of how often their money is doubling.
Here’s how it works: to calculate when your money will double, divide 72 by the interest you earn on your investments. For example, if you’re earning 1%, then divide 72 by 1. It will take 72 years for your money to double. If you earn 7% interest, your money will double in just over 10 years.
If you’re already 55, there’s not much time for your money to double. Start saving as soon as you can by saving small amounts—even $100/month makes a big difference.
#2 Overcoming Procrastination
People who procrastinate usually have countless reasons to avoid saving.
Perhaps they’re dining out with friends this weekend. Next month they could be taking a vacation. And the month after that? They’re celebrating an important birthday, gearing up for the holidays, or paying off their credit card bill in January.
Others procrastinate because they mistakenly believe they’ll have more money in the future—when they get married, have children, or send their kids to university.
Overcoming procrastination is an important part of effectively managing your money. If you can make saving a habit when you’re young, you’ll likely avoid the procrastination trap.
#3 Learn to Set Goals
Young people typically have both short- and long-term goals: paying off student loans, buying a car, planning a wedding, purchasing a house, sending the kids to university, and eventually enjoying their golden years.
It becomes much easier to reach these financial goals if you’re in the habit of saving money. Budgeting also helps. It’s a useful tool to show you what you earn versus what you spend—and how to reduce spending if you need to save more money to achieve what you want in life.
How much you allocate to each goal depends on your budget.
Should you pay down student debt or put more money into an education savings plan? Some people make these decisions for themselves; others benefit from an objective, outside opinion. In fact, don’t wait until you have money before finding a trusted financial advisor—they’re an excellent resource when you’re starting out.
There Are NO Get Rich Quick Schemes
The number one mistake I see young people making about money is taking on a ridiculous amount of risk, such as investing in a junior stock a friend recommends. Higher amounts of risk do not mean higher returns.
Even at a young age, you need some balance in your portfolio. Markets fluctuate. An unexpected event could occur, requiring you to withdraw money from your savings on a day when markets are down.
A good rule of thumb is to keep 70% of your savings in international mutual funds and a few individual high quality Canadian stocks, 20% in balanced or fixed income investments (high interest savings deposits or balanced mutual funds), and the remaining 10% in aggressive investments (resources or emerging markets).
You need time and discipline to grow your capital. If you take saving seriously at a young age, you’ll automatically develop good personal finance habits, while educating yourself about money matters.
Managing your money well affects all aspects of your life. Take your personal finances seriously, become informed ... and enjoy the rewards.
If you want to be financially better off throughout your life, get in touch.