Great Savings 59 – Build Hope For The Long-Term

 

This beautiful sunset promises a bright new day.

Do you hold hope for the future?

Nothing kills a savings plan faster than the inability to think long-term. For some thinking long-term is easy. For others, the lack of hope for something better makes the very notion of long-term investing feel like an impossible dream. Yet it’s worth asking: Is hope something that happens to us by chance or something we hold the power to create?

 

Great Savings 59 - Build Hope For The FutureThe math is fairly straight forward: Put a few dollars away on a consistent basis in an investment plan generating a decent return over the years (or better yet over several decades) and the potential is to end up with a tidy nest egg that can amount to tens of thousands, hundreds of thousands, or even millions of dollars. We’d call that hope. What you end up with is a matter of:

 

  • How hard you keep trying.
  • How consistent you are about investing money.
  • Whether or if you withdraw money in the meantime.
  • How much you put away every month.
  • The rate of return on your investment.
  • How you spend the money you’ve saved.
  • A bit of luck.

 

 

Let’s face it, some people are blessed with good jobs, great incomes and they never seem to get caught up in the drama of life. If that’s you, saving a cool million or two is entirely possible. However, even if you have a limited income the potential to save a large sum (i.e. tens or even hundreds of thousands) is entirely within your grasp.

 

How? Let’s take a real example to see how saving money consistently over the years can add up. Assume we have only $20 per month we can put into an account that receives an average monthly compounded interest rate of 5%. Let’s also assume we just keep adding to it until we hit retirement, or say, over the next 40 years.

 

An example of compound interest.

Even a small monthly sum saved adds up over the long haul? Want to build a brighter future? Then start taking steps today.

 

One of the coolest features of interest is how compounding works its magic over time. Thus, the first month we stick $20 in the bank it’s still just $20, but by the end of the 2nd month (assuming we compound monthly), we add interest to our original invested principal so that instead of having $40 (that’s $20 principal for the first month and $20 for the second), we also get to add on the interest on the principal we had invested the previous month.

 

To be more precise, a 5% annual interest rate is equivalent to 5% divided by 12 months or .417% monthly. This can also be written as .00417. Thus if we multiply $20 times the monthly rate of .00417 we also get an extra 8 cents of interest. At the end of the 2nd month we therefore have $40.08 ($20 + $20 + $.08) in our account instead of $40. And after the third month we have $60.25 ($20 + $20 + $.08 + $20 + $.17) and so on. Admittedly, these first extra pennies of interest may see miniscule on the surface, but let’s see what happens as we continue to accumulate both principal and interest over the course of 40 years.

 

How important is it for you to buy new?

Can you save money in other ways? For example, can you cut spending by buying some items used?

Though we shortened our chart above to save space, you can see we ended up earning far more interest over 40 years ($20,920.40) than the money we actually contributed monthly (40 years x 12 months per year x $20 per month = $9600). Thus our total principal and interest in the end was $20,920.40 + $9600 or $30,520.40. You read it right: A small monthly investment of $20 netted over 30 grand because of compound interest! Yes, it’s true we required a 5% annual rate of interest to make this happen and currently bank accounts are only offering a percent or less on savings. Thus, finding an investment that pays more may be critical to your savings plans.

 

What type of account might pay more? Over the long term and in spite of their risks of fluctuating in value, stocks and bonds both have significantly higher rates of return than bank savings (something like 5 – 8% on average). However, if you are risk averse you may want to stick with a guaranteed savings plans like a FDIC insured bank savings account. If you need more information on risk and return please read our post: What Kind Of Investing Is Best?

 

Of course, saving for the long-term is really just one side of the equation. It may feel hard to put any amount into a savings account if you end up spending everything you earn. For that reason, getting a handle on what you spend and the debt you hold may be the first step you take as you go to build a brighter future.

 

When you start looking at the big picture there is a ton you can do improve your odds. And that translates directly into holding the power to create hope. Here are just a few ideas get started:

 

(1) Set up an automatic savings plan that takes money out of your checking and puts it into your savings every time you get paid.

 

(2) Start annualizing costs for all the things you buy. For example, buying a cup of coffee everyday from the stand at $3 per cup times 5 days a week times 52 weeks is $780 per year. Now ask whether you really want to spend $780 of your annual income on coffee from the stand when you can make it yourself for a fraction of the price? If not, could you put that money aside? For more on this subject read Great Savings 10 – Spending Consciously To Build Wealth.

 

Determine the annual cost for the things you buy to see if they make the best sense.

A terrific way to determine if the spending you do makes good sense is to “annualize” the cost. For example, that $5 burger per day habit costs up to $1825 per year! Would you spend even half that if you made your own lunch?

(3) Are you getting regular gifts of cash from a relative for birthdays and holidays? Instead of spending them can you add them directly to savings?

 

(4) Did you get a windfall like an inheritance or have run of luck at the casino? Instead of buying a new car or boat, stick the money into savings and commit to leaving it there for at least one month. When the month is up then decide if you still want/need the car or boat or can do without. For more on the incredible power in waiting to buy read our post: Great Savings 35 – Wait To Buy.

 

(5)  Are you still using credit cards to make purchases you can’t afford? Find out why cash is really king by reading Great Savings 34.

 

(6) Are you clipping coupons? Could you take the amount you saved on groceries and set it aside in a savings account? When you do this you actually end up rewarding yourself big time. Remember, those tiny discounts add up into big bucks over time and when you hold them in savings you earn interest on top.

 

For more on the topic of spending less than you earn be sure to check out Great Savings Tip 42 by clicking here.

 

Action Plan: Are you stuck in a short-term holding pattern? Are you barely able to scrap by each month? Are you tired of it? The only way to change is to commit to taking real and concrete steps. When we fail to save money for the future we end up robbing ourselves. The theft is in what our savings allow us to buy down the road, or more specifically, the opportunities a pool of savings affords us. Don’t allow yourself to think of the future as one without hope for something better. If you haven’t started a savings plan, commit to taking the first steps today. And if you already have one, commit to cutting your short-term spending so you can put more aside each month. Remember: Hope for the future doesn’t happen by accident. We create and build on it by thinking long-term.

 

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