My fellow financial blogger and Garrett Planning Network member Jim Blankenship has challenged members of the financial planning community to do our part to encourage an increase in the overall savings rate in America. The numbers are pretty dismal of late. According to the Bureau of Economic Analysis, our savings rate was actually negative in 2005. It’s tough to prepare for retirement when on average we’re spending more than we’re bringing home. The massive economic disruption of 2008 seemed to scare us straight for a while, but we’re running at a rate of just over 3% right now, and that won’t get it done.
The 1% Solution
The roster of bloggers that have responded to Jim’s call to action is impressive, and their ideas are well worth reviewing. One concrete objective of many of the writers is to encourage readers to save an additional 1% of their income. That’s a worthy goal, certainly, and a step in the right direction for just about anybody. If nothing else, I think you should start there.
Make Saving a Habit While You’re Young
My real focus of this post, though, is to encourage young wage earners to take the long view and start saving in a significant way now. The biggest benefit of starting early is that the magic of compounding is maximized. Added to that, though, is the fact that making saving a way of life early will create a habit that will serve you well as time goes on.
Why should you care about saving? Retirement is expensive! If you’re in your twenties and have young twins or triplets, you’ve probably already given thought to several other significant expenses that are coming down the road, in addition to the cost of everyday living. If setting aside a piece of every check is a habit in your twenties, it will be a habit in every other decade of your life, and it will be that much easier to achieve your financial goals.
More tangible, though, is the simple math of compounding. I’ve used this following graphic before, and I think it’s very powerful in terms of illustrating the importance of starting early. In short, if you start saving $10,000 per year at age 25, and your investments grow at a rate of 8% per year, you’ll have nearly $2.6 million at age 65. If you start at age 35, that number will be closer to $1.1 million. Granted, saving $10k every year starting at 25 might be a challenge, but it’s the math that is important. If having a million dollars is really your goal, you can get there by investing about $3,860 per year for 40 years if you average 8%.
You get the picture: start young, live below your means, make saving a habit, and don’t ever stop.