Dennis Smith
One of my fondest memories of the firehouse I worked in was of the firefighters studying for promotion. They took those exams for lieutenant and captain as seriously as an astronomer would follow a new star. They realized, as we all do, that the better prepared we are for an examination, the better we will score, and so each remembered fact becomes important to our future.
Interestingly, it is the same way with saving money. Each dollar you save can become essential to a secure future for you and your family. And, in the same way most firefighters do not put off studying for promotion, it is always better to determine to begin saving money sooner rather than later.
"Saving." For many, the word is synonymous with sacrifice, pain, scrimping, doing without and general grief. But for others, "saving" evokes thoughts of being smart, having enough, freedom from want and worry, and even a very wealthy old age. Americans have historically been good savers, especially the generation that lived through the Great Depression. But as a nation, we're saving less and less. In fact, last year, our national savings rate went into the red, as Americans collectively spent more money than we earned.
Why aren't we saving more? As Americans grow older, many retire and start living on their savings. This is normal and expected, and accounts for some of the decline in the savings rate. But many working Americans are saving less too. Maybe they've earned so much in the stock market boom that they figure they can afford to "live a little." Maybe they've been so optimistic about the economy and their own ability to make money that they can't foresee a need to save.
But too many Americans don't understand the relationship between saving and future wealth, how giving up a little now can yield a whole lot later. What I mean is, by saving a little money, consistently, and investing that money, you could earn a fortune for the future.
Here's an example: Say you and your spouse go to the movies each week. With tickets at $8 each, and $10 for refreshments, you're spending $26 a week. What if instead, you saw the same movie at a matinee for $4 and passed on the greasy popcorn. You'd still see the same movie, and would save almost $1,000 in just one year. See how it adds up? Would you believe that if you invested (at 10%) the savings of just one year from this new movie-going system, in 30 years, you'd have $17,450! No joke! No exaggeration!
"How?" you may ask, in disbelief. The answer is compound returns. That means that you earn a little investment income on your initial savings, and after that, you earn money on that investment income, and after that, you earn money on the investment income that was earned on investment income, and so on. Here's an example: See how you earn more investment income every year, even though you haven't added a penny? Each year, you're earning 10% on the previous year's total, and since the total keeps going up, so do your earnings!
What if you made a habit of saving your movie money and added $1,000 each year to your savings? In 30 years, you'd have $188,000! Once you see the rewards you can reap from a little bit of savings, I bet you'll think of more ways to save, such as: brown bag your lunch instead of eating fast-food. Weekly savings: $17.50. Invest monthly at 10%; when you retire in 30 years, you'll have a whopping $165,000. One more: Try to use your credit cards less. An average balance of $3,500 at 17% costs $50 per month in interest. If you pay cash instead, you'll still get to buy all the same stuff. Invest what you're saving in interest and you'll have $112,000 in 30 years.
A word of caution: a lot of people save money on this or that, but they don't invest the difference – they just spend it on something else. Obviously, this is no way to get ahead. Make sure you open an investment account and add your savings to it each month. Setting up a direct deposit is a great way to make this efficient and painless. Another word of caution: compound earnings is much more powerful if you start saving EARLY. If you save $1,000 a year from ages 25 to 35 and never save again, you'll have more money at age 65 than your buddy who saves $1,000 a year from ages 35 to 65. You save a total of $10,000, while he saves $30,000 and you end up with more money! So start today!
I'm not saying that only the foolish indulge in a night at the movies or splurge on a lunch at Wendy's. I just want you to be aware of the trade-off you're making when you spend now instead of investing for the future. Take advantage of compound returns to make your future secure; think of a couple of items that you ordinarily spend money on, but could do just fine without. Make a plan for saving that money and regularly adding the saving to your investment account. It won't be nearly as hard as you thought, and in the long run you will have plenty to show for your efforts!
In a box...
Savings Investment Total Income earned
- First year $1,000 $0 $1,000
- Second year None $100 $1,100
- Third year None $110 $1,210
- Fourth year None $121 $1,331
- 30th year None $1,587 $17,450
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About the Author - Dennis Smith
Dennis Smith is the founding editor of Firehouse Magazine and the best selling author of
Report From Engine Co. 82 and other books. He has completed the federal Series 7, Series
63 and Series 65 exams and is a licensed financial advisor. Dennis Smith will be providing
some financial insight beginning with the January issue of Firehouse Magazine, as well as
authoring regular on-line commentary for Firehouse.com.
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