Lately there has been a lot debate about spending vs. investing. Some argue that we need to spend our way out of the financial crisis, while others counter that is what got us into this economic mess and that consumers need to invest.
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But when it comes down to it, how a person spends money is far more important than how it is invested. It’s much easier to reach financial goals by deciding how to live rather than how to invest. Deciding how to spend the money we earn responsibly is what brings peace of mind, not how much we make or how much we have.
An Expensive Car Now or a Million Dollars Later?
Perhaps you think the difference between a full-sized car, a fully-equipped vehicle and a compact car is only about $10,000. Actually, it is more like a million dollars. Consider this: Borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381 a month.
If you saved the difference of $253 each month for 35 years, and if we assume that the money is earning an 8% average rate of return, (which is slightly less than the equity appreciation rate over the last 35 years), then your dollars would swell to $580,352.
While this sounds fantastic, there is actually even more potential for growing this savings when you consider the earnings associated with withdrawing the funds during retirement. If you invested in a fixed indexed annuity, for example, between ages 65 and 90 you would get monthly payments of $4,479 from that sum, which adds up to a whopping $1.3 million.
This is the magic of compound interest. However, it is not retroactive, one must save now to enjoy the benefits of compound interest in the future.
If the difference in the example above were a time period of only 25 years instead of 35, then the $253 would grow to just $240,000. Paid out at $1,857 a month, the total would be $557,000. It is amazing that the difference in saving for an additional 10 years is about a half million dollars. This huge difference shows how today’s lifestyle decisions can be worth $1 million in retirement years.
It’s never too soon to begin saving money. If 10 years could mean a difference of $2,622 in retirement income each month, can you imagine what 15 or 20 additional years of savings would mean when you reach age 65?
The Snow Ball Effect of a Little Postponement For most, it would be much easier to save if they had bigger incomes. But there will always be a “good” excuse not to save.
People 17 to 23 years old may think: “Me save? Are you kidding? I am just getting my education and besides I want to have a good time. When I get out of college and start my career, I’ll start saving.”
People 24 to 30 may be tempted to think: “You don’t expect me to save now? I have only been working a few years. Right now, it is important to dress well. I’ll save later.”
From 31 to 42, the reasoning may go something like this: “How can I save now? I am married with small children. Perhaps when they are older I can think about saving.”
Those 43 to 55 wish they could save now. However, many don’t placing the blame on college-bound children and education loans to pay.
From 56 to 65 most recognize the urgency and try to turn up the heat on saving, but it’s tough to break years of over-spending habits.
At age 65 and older, it is too late to begin saving money. You cannot save when there is no income. Many older people live with their children and are dependent on Social Security, which is inadequate, since Social Security was only designed to be supplemental in retirement.
If the choice between cars can impact retirement income, imagine the possibilities when applied to lifestyle choices such as a home, vacations, dining out, entertainment, wardrobes, furnishings, and more.
Try to develop the art of money accumulation now. Begin by saving every day, starting today.
Family Finance Expert, Princess Clark-Wendel, holds an MBA from the University of Chicago and is the author “A Pocketbook of Hope in Tough Economic Times.” Ms. Clark-Wendel is an international business consultant and financial advisor who has held management roles in two Fortune 100 companies. Visit Princess at www.livelifeworryfree.com