The Importance of Saving Money

by Tom Tousignant

in Blog, Budgeting, Financial Safety, Wealth Building

the most important factor about saving money is to start today.  Saving a little today will almost always give you more money than saving more money, but starting later.

Consider this example, and ask yourself, who will end up with the most money at retirement?

Sarah the Saver” is a hard worker who understands the value of time and the importance of saving.  She starts saving money when she is 16. Each year, she saves $2,000 – roughly 250 hours of work at minimum wage. when she is 16, it is about half of her summer earnings – six weeks of full-time work in the summer. It’s not an unrealistic amount of money for an enterprising 16 year old to earn, while still having plenty of money for current spending.

Saving becomes a habit, and Sarah the Saver puts away $2,000t every year. Even after she begins her career in her mid-20s, she still only saves $2,000 per year.  She invests these savings in a conservative way, using a ROTH IRA account so the investments won’t be taxed. She doesn’t make any wild bets, just puts 40% of her savings into short-term, highly rated corporate bonds. She puts 40% into high-quality “dividend growing” stocks, and puts 10% into gold. Simple.

Her portfolio only produces modest returns. Over time, she earns about 8% a year – mostly by reinvesting dividends and interest payments. Sarah is not worried about getting “rich”, she’s just saving money.  And, it’s pretty easy because she never saves more than $2,000 a year, even as her income increases. She has plenty of money to spend on things she needs and wants, in fact, her friends don’t even know she has this weird habit of saving money each year.  But, she always remembers to save first.

By the time Sarah is 40 years old, she’s contributed $48,000 in savings to her portfolio. At that point, she gets bored with saving and decides to quit. So at age 40, Sarah the Saver becomes “Sarah the Used to be a Saver” – she stops saving money, and now spends all the money she makes for the rest of her life.

Sam the Spender” doesn’t learn to save as a child and doesn’t even get a job until after college. By that time, he’s so busy buying things – cars, vacations, dinners at nice restaurants, clothes, houses, etc., he never can “afford” to save a dime.

(Fortunately for Sarah the Saver (and her Dad), Sam and Sarah never meet, never fall in love, and never get married!)

Sam wakes up at age 40 and realizes he doesn’t have anything in the way of a retirement fund. So, he begins to save, and he does a great job. He starts putting away $10,000 per year, every year. He knows he’s got to play “catch-up”.  Just like Sarah did, he invests conservatively and earns 8% a year. He reinvests everything, like Sarah. By the time he turns 65 years old, Sam has contributed $250,000 towards his retirement.

Guess who has a bigger portfolio at age 65? Is it Sarah who never contributed more than $2,000 per year and whose savings totaled $48,000 in her lifetime… or is it Sam, who enjoyed his early years, and then saved more than five times as much money?

At age 65, Sarah the Saver’s portfolio is worth a bit more than $1 million. Sam only has 800,000, even though he put over $200,000 more into his account than Sarah did.

How does retirement work out?

At age 65 Sam retires, he stops saving, and starts withdrawing $100,000 a year to live on in retirement.  By starting with just over $800,000, and still earning 8%, Sam makes his money last 11 years – until he is 76 – and now broke.

Sarah waits until age 70 to start spending her money.  So, during the 5 years when Sam is spending again, Sarah’s money is still growing.  At age 76, when Sam is out of money, Sarah has over $1.5 Million and at age 95, she has $2.2 Million and her money is growing faster than she can spend it!

Here are the key lessons from this story of Sarah and Sam:

  • Starting early is more important than how much you save
  • Compound Interest only works over long time frames
  • Watch out who you marry!

Oh yeah, what if Sam misses a year at age 43 since he is not really used to saving?  he doesn’t just lose the $10,000 investment, he loses all the earnings of that $10,000 and the earnings those earnings earn?  he runs out of money FIVE YEARS sooner – just by skipping one year!

Start the habit of saving today, and teach your kids to do the same – who knows, maybe your child will grow up to be a US Senator and save our country by knowing how to save!

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