I've never made much money. I'm college educated, a whiz at Trivial Pursuit—but the skills, talents and passions I've been blessed with aren't ones that generate much cash. And yet, I'll be able to come up with the funds to put our four children through the college of their choice. How? Simple. Saving money and letting it compound over time really works.
When my children were toddlers, I scraped together $500 per child and purchased some stock. It was such a small amount that my husband and I ignored it and just let it grow. And the Lord blessed that decision in his abundance. What delights me even more is that God allowed me to contribute so fully, while staying at home, raising children and writing.
Why save? There are many good reasons: the first of which is that we are asked to be good stewards of what God has given us.
While Christ was clear that our trust and sense of security shouldn't lie in our riches but in God, it is also a biblical principle to work diligently and plan for the future. Consider the work ethics of ants, advises wise old Solomon (Proverbs 6:6). Ants never give up. They plan for winter all summer. They plan for summer all winter. And while they gather food for winter, they gather all they can.
Another reason to save is that our life expectancy is getting longer. Your retirement may last 20-30 years. According to the Johns Hopkins School of Hygiene and Public Health, the average American life expectancy hit an all-time high in 1999 of 76.7 years. The World Health Organization (World Health Report 1999) states American women live, on average, seven years longer than American men and have higher medical expenses than men. Currently, men in the U.S. average 73 years, women 80 years.
Then there's the peace of mind that comes with savings. With money put aside for a rainy day, I don't panic when the roof starts leaking or the car sounds funny.
My husband and I have always been conservative spenders—not typical of our "work now, spend now" peers. We bought an inexpensive fixer-upper house in our area, remodeled it and then paid it off within eight years—at the point in which interest benefits on taxes begin to diminish. (Recently, I came across the meaning behind the word mortgage. It has Latin roots that are chilling: Mortuus means death, gage mans grip. Mortgage means death grip. Hmmm.)
We also started deferring income early in our twenties through 401(k)s and IRAs. At times I wondered "When is this going to pay off?" especially as I observed friends' razzmatazz accumulations. Within about ten years, I could see aggressive saving had been worth every unspent penny. We've never really missed the money we deferred, we're prepared for college and emergencies, we have the option of an early retirement or a career change and we've created a built-in self-discipline for ourselves. And we've modeled fiscal responsibility to our children.
Of course, you don't have to be as conservative as we've been to reap lifetime benefits from saving. Develop these habits while you're young—with small amounts of money that you probably won't even miss—and I guarantee that you will appreciate it one day.
Painless Savings Strategies
1. Set Goals. It helps to know what you hope to accomplish, so set long- and short-term goals. Do you want to buy a house? Or retire at age 55? Determine how much you need to save each month toward your goals.
Like many couples, Jeff and Gail DeBell of Woodway, Washington, disagreed about how to handle money. "Our goals weren't the same," says Gail. "I was more interested in enjoying our money; Jeff grew up much more frugally and was programmed to save. When we were first married we had friends who spent huge amounts of money on entertainment and live-for-the-moment kinds of things like cars or trips. Now a lot of them are looking at retirement in a few years with no savings."
Now that Jeff and Gail have been married 20 years, she has a better appreciation for Jeff's vision. "He had a dream to pay off the house. He wanted to be debt-free when we got to the college tuition phase of our lives and to move up retirement, which come very close together," Gail says. "I have to admit it is pretty nice to have that mortgage money freed up every month. Jeff was the driving force in good, wise decisions along the way."
Even if you're not sure what you'll do during retirement or what it will cost, you can still set a goal. For people, in their twenties or thirties, a retirement savings goal might just be saving as much as possible.
Carol Vannerson of Olympia, Washington, says, "After we had been married about a year, I remember asking Stu, 'What exactly are we saving for?' and he answered 'Retirement.' Then I said, 'Well, I can't wait to retire because boy, are we ever going to be rich!' Ten years later it was great to know that we had a big buffer there."
2. Take Full Advantage of Compounding. Most people don't realize the power of compounding—but King Solomon did. "He who gathers money little by little makes it grow" (Prov. 13:12).
"Over a 20-year period the benefits can be incredible," says financial consultant Kris Fry. "Small amounts like an extra 25 dollars a week, given 30 or 40 years to compound, really add up."
For example: If you start at age 25 by investing $2,000 per year for 10 years (total investment of $20,000) at an 8 percent average rate of return, by age 65, you have $291,500.
Starting at age 35—investing $2,000 per year for 20 years (total investment of $40,000) at an 8 percent rate of return, by age 65, you'll have $197,500.
Start early and let money and time work for you. "The easiest way is to pay yourself first and have the money disappear from your checking account before you can spend it," advises Kris. "You will be truly amazed at how fast it adds up and starts to build.
"I firmly believe that most of us can find $100 a month to put away for our golden years—just make it happen," advises Kris. "I cannot over-emphasize the benefits of starting to save at an early age, as early as possible. The best time to plant a tree was 20 years ago—the second best time is today."
3. Take 10 Percent off the Top. Kris recommends adding to your savings amount as income increases. "An excellent way to invest is to take 10 percent of your take-home right off the top of your account so that you never see it and then as your income increases, so does your investment."
If you invest in the stock market with your savings, a benefit of the "10 percent off the top" strategy is that you dollar-cost-average into it.
Since the market can go up and down throughout the year, when you dollar-cost-average, you end up buying more shares at a lower price and fewer shares at a higher price. "You are not trying to time the market—no one can," she warns.
Kris is not a believer in budgets. "They never work," she says. "Instead take 10 percent for tithing, take 10 percent for saving and use the remaining 80 percent."
4. Max-It. One way to boost the "save as much as you can" approach is to maximize automatic saving through payroll deductions—including your 401(k). Most are better off with forced savings, because it's out of your paycheck before you see it. Taxes may be a fact of life but your part could be offset or deferred through 401(k)s, 403(b)s, IRAs, etc.
5. Keep Hands Off Savings. Don't make the mistake of borrowing against your retirement money, or your money stops working for you. Studies show that people often borrow from their 401(k) when they're most vulnerable in their careers—in their late 40s or 50s. If you don't pay that loan back, it's considered a distribution, and that means you pay income and penalties.
The Tortoise and The Hare
"Some problems today stem from the Silicon Valley mentality—that anyone and everyone else is out there getting rich so I can too," says Kris. "This get-rich-today mentality is causing people to do stupid things: borrow and then trade on margin, use the Internet to trade so often that all their gains get eaten up in transaction fees and buy on a whim without doing the necessary legwork to make a good, solid investment. A well-managed, no-load mutual fund is [still] most people's best bet. By doing the monthly investing, you dollar-cost-average into your fund and watch your money grow."
Aggressive saving is more of a lifestyle than anything else. "Like a lot of other things, it just becomes a habit," says Carol, "and like all good habits the sooner you start the easier it becomes and the later you start the harder the bad habits are to break."
The real way to build wealth is through consistency, patience, and sticking to a savings and investment philosophy that you believe in.
Suzanne Woods Fisher is a freelance writer who has published over 40 magazine articles. She lives in Hong Kong with her husband and four children.
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