Back to Basics: Save Your Money

How basic can it get? This is part Back to Basics, part public service announcement, and 100% simple reminder: Save your money.

I bring it up because it’s an easy trap to fall in to. Any number of things can disrupt your savings plan — from a job change or loss to a larger-than-expected financial emergency to you just plain getting complacent.

… and, when it’s time to resume or increase the amount you save and invest, you miss the boat.

Returns

Earning a return on your money is a neat thing, it really is. You put money in an account, give it some time, and — if all goes well —  you suddenly have more money than you started with. Compounding returns, which are earning a return on the returns you’ve already earned on top of your original investment, are extra sweet.

But one extremely important factor in determining how much money you will have available to you when it’s time to use your savings and investment accounts is your persistence in doing the saving and investing regularly.

Check out this example to see what I mean.

Savings 101

Let’s say you have $50,000. I don’t care how you got it — you could have saved it, inherited it, found it, whatever. If you earn an average annual return of 7% on just that flat $50,000 over the next 20 years, you’d be left with $201,937. Compounding has been your friend here, and you’ve more than quadrupled your money over the 20 years.

Now let’s say you’re going to add $100 per month to that same $50,000 over the same 20 years. Almost everyone can squeeze $100 out of their budget with a little motivation, and doing this adds a total of $24,000 to our hypothetical account over time. Earning the same 7% average annual return, you’d now have $254,030 — or over 25% more money than in the above example.

That’s 25% more money for doing no more than saving and investing that $100 per month instead of spending it. Of that additional $52,093, you only had to add a total of $24,000 over the 20-year period, which is less than half of the gain.

But none of it would exist at all if you hadn’t done the initial saving.

Go ahead, grab your budget, evaluate your accounts, consult your financial professional, and figure out how to save [more of] your money.