Everyone does it backwards – why saving early and often and splurging later is better
Estimated Reading Time: 5 minutes
Raise your hand if at any point in your life you desired to be chained to a desk for thirty or forty years. I’m guessing very few hands went up. Why are the decisions we make in the early phases of our lives have an outcome that results in just that? Do we succumb to the mindset that it is just the way it is supposed to be because prior generations did it that way? Or do we lust for luxurious things and being the perfect model consumer the large corporations seek to inspire? It is a fairly complex and thought provoking question. The interesting aspect to it is it has no bearing on income level, education or upbringing. To avoid being chained to a desk it’s a simple mathematical equation coupled with personal intentions. Don’t believe me? Let ‘Mr. Saver’ explain.
Being financially independent has nothing to do with income or education or what type of upbringing. It does have everything to do with the amount you spend – and that is a choice. The common theory is once your nest egg is equal to or greater than 25 times your annual spending you can pretty much break out the mariachis and throw yourself a fiesta (Cinco de Mayo is right around the corner after all). This provided you can live off the 4% rule, better known as the Trinity study. For the skeptical bunch, Zach, over at Four Pillar Freedom actually does a really intriguing study about the performance of such a portfolio. That should make you sleep easy at night. If for some reason you need further validation, Mr. Money Mustache outlines the concept and situation pretty clearly here as well.
the secret is your spending
Hopefully at this point you don’t need much more convincing centered around the idea of saving. Where the convincing probably comes in is that choice I mention above tailored around your spending. And that is exactly what trips most people up. Most everyone does it backwards. The secret is knowing with a little patience and diligence you are able to pretty much do both; be financially independent and having the things you desire. Imagine that, a saver and a spender! 🙂 I might bet that doing it this way you end up wanting far less, however.
Let’s use an example of an eighteen year old teenager. It’s senior year in high school and they are already dreaming of the college parties and freedom that sits just beyond their reach. Flash forward four years (maybe five for some…but let the record show only 3 1/2 for me) and this twenty-two year old emerges with a college degree and a modest student loan amount of $35,000.
the debt snowball begins
This new college grad is lucky and grabs a decent entry level job making $45,000 with bonus potential up to $55K. Of course they need a new car and buying a used one is so twenty years ago. There goes another $30,000. So now our lucky business professional is $65,000 in the hole. But wait! There’s more! Thursday after work happy hours are a great way to socialize and meet people. Friday night’s are a way to unload some steam from the work week stress. Saturday’s are meant for wooing that little cutie they have their eye on. You’ve probably guessed credit cards are being used to fund this. Let’s chalk that up to $10,000. Now our go-getter is $75,000 in debt and we haven’t even touched the new work wardrobe or the 4K television or that iPhone 10 that costs $1,000. The vacations that are so badly needed. Or buying a home and furnishing it. The list goes on.
It’s probably fair to say the weight of the world is starting to come down on our young star. There is now over $100K in liabilities and they are slaves to work and the institutions they owe money. There is no rainy day fund for when something goes awry and nobody is thinking of getting laid off. Certainly the thought of saving for retirement isn’t even a concept explored. Our perfect prospect is now that person chained to their desk for thirty or forty years stuck in a rat race they grow to hate only five years into their career. So now what?
The good news is that even if that is the case there is hope. After all, I was one of those individuals even if the situation wasn’t 100% my own doing. We are proof there can be a way out and it doesn’t take exorbitant salaries or tons of advanced degrees and schooling to make it happen. Just a plan and hard work with a burning desire to stay committed. Imagine, however, if things were a little different.
save early and then never save again – if you don’t want to
What if upon graduation while still used to roughing it with cheap meals and multiple roommates we extended this style of living for a few years? This can be a supercharge boost in the savings game for a few reasons. Firstly, there is the time value of money and the impact of compound interest can greatly influence this. Secondly, your time horizon definitely plays a role in the outcome and flexibility of your approach. Most importantly, if done right you could save for a few years and never have to save another dime again if you were content working until 65 and could manage your income to not live beyond your means or go into debt until you reached that mark. If you decided you wanted an early exit and continued saving it would only expedite the journey.
Financial independence is a byproduct of not just what is earned or saved but also what is spent. Which is why this chart below really drives home why saving early and often and splurging later is more beneficial for your financial health for so many of the reasons I have already described. Of course it is just a rule of thumb but it does illustrate an important concept, the more you save the better you are and the earlier you do it the more options you’ll have:
In a future post I’ll explore the more profound impact of compound interest so if this hasn’t already got you stoked to jump on the bandwagon….maybe that one will. Until then, thanks for reading and happy saving!
