If you’re younger than thirty years old,
you possess the single most desirable component of the investing universe–time.
Time is the one factor that is the most powerful when it comes to your money
growth. If you haven’t yet hit the big
3-0, you have a lot more going for you than you may realize. A little sacrifice
now can produce huge rewards for you over the next several years if you follow
a few basic rules. So, in essence, you have an investing advantage that a lot
of “older” people don’t–time.
To make the most of the advantage of time
and money during this phase of your life, you should consider these 5 basic
truths. Apply them and watch the essence of your financial outlook take
shape before your very eyes.
1. Start
Now.
There’s no time like the present to
radically affect the future, especially when we’re talking about your financial
future. When I was twenty-four years old I was fortunate enough to have a
friend, a mentor, who stressed the importance of starting early when it came to
investing for my financial future. After I had exhausted just about every excuse
I could muster on reasons not to invest, he introduced me to the magic of
compound interest. It was all I could do to contain my excitement.
I began by reconstructing my finances and my way of thinking. Doing so put my financial future on a very different path than it was on. I started by putting aside $25 per payday. At first, it was one of the toughest things to do. Not so much because I needed the money, but more because I was used to consuming the entirety of my paycheck on things my family and I “needed.” Since then, I’ve learned quite a bit about recognizing a true need from a fleeting desire. What a difference it has made.
I gradually increased the contributions to my savings. My first goal was to be able to save 10% of my income. I managed to hit that goal rather quickly, not because of pay raises (although with every raise since then I have put aside a portion for savings) but because the desire for financial freedom was stronger than the desire for immediate gratification.
As the amount of my savings grew I became even more motivated. I increased to 15% and then to 20% and to a figure that you would likely find difficult to believe today, all while increasing my standard of living.
I began by reconstructing my finances and my way of thinking. Doing so put my financial future on a very different path than it was on. I started by putting aside $25 per payday. At first, it was one of the toughest things to do. Not so much because I needed the money, but more because I was used to consuming the entirety of my paycheck on things my family and I “needed.” Since then, I’ve learned quite a bit about recognizing a true need from a fleeting desire. What a difference it has made.
I gradually increased the contributions to my savings. My first goal was to be able to save 10% of my income. I managed to hit that goal rather quickly, not because of pay raises (although with every raise since then I have put aside a portion for savings) but because the desire for financial freedom was stronger than the desire for immediate gratification.
As the amount of my savings grew I became even more motivated. I increased to 15% and then to 20% and to a figure that you would likely find difficult to believe today, all while increasing my standard of living.
If you simply cannot see a way to set something aside, keep reading. Perhaps some of the remaining concepts will help you to discover areas that’ll free up money within your personal budget so you too can start now. Remember, nothing begets nothing; while something compounded increases itself. In other words, if you do (or save) nothing, nothing is exactly what you’ll have. Absolutely no one cares about your money like you do. Take control now!
2. Live
within your means.
One of the toughest financial concepts to
control is the ability to live within our means. Oftentimes, it takes more of a
psychologically disciplined approach because of the inevitable competing
demands for our money, not to mention our appetite for a quality lifestyle.
As we begin to make money, most of us tend to begin building a lifestyle just beyond what we can afford, effectively living outside our means, because after all, we expect to get raises and grow into a lifestyle. Why not push it a bit to “get ahead?” We begin to rationalize our desires by re-labeling them as needs. What occurred to me over the years as I was saving a significant portion of my income was the fact that I never felt as though I had sacrificed my standard of living. My family and I simply became accustomed to living well within our means while validating the relevancy of desires versus needs. Buying a car, getting married, and purchasing a house are just a few of those needs. Here’s a tip: no one really cares what kind of car you drive. Sure, the BMW hard-top convertible is nice, but is it worth sacrificing your financial future for? Keep in mind that a car is among the biggest obstacles between you and the success of a secure financial. Apply the car example to just about any aspect of the concept of living within your means and you’ll quickly realize the essence of the magic behind this truth. By the way, some people never realize this foundational truth. So master it and watch how you soar past your peers as they wonder just how you’re doing it.
As we begin to make money, most of us tend to begin building a lifestyle just beyond what we can afford, effectively living outside our means, because after all, we expect to get raises and grow into a lifestyle. Why not push it a bit to “get ahead?” We begin to rationalize our desires by re-labeling them as needs. What occurred to me over the years as I was saving a significant portion of my income was the fact that I never felt as though I had sacrificed my standard of living. My family and I simply became accustomed to living well within our means while validating the relevancy of desires versus needs. Buying a car, getting married, and purchasing a house are just a few of those needs. Here’s a tip: no one really cares what kind of car you drive. Sure, the BMW hard-top convertible is nice, but is it worth sacrificing your financial future for? Keep in mind that a car is among the biggest obstacles between you and the success of a secure financial. Apply the car example to just about any aspect of the concept of living within your means and you’ll quickly realize the essence of the magic behind this truth. By the way, some people never realize this foundational truth. So master it and watch how you soar past your peers as they wonder just how you’re doing it.
3.
Pay down debt.
Every dollar that’s tied up in paying
down debt is one less we can use to save for the future. Create a plan to
reduce debt by devising a plan and sticking to it, which will, in turn, allow
you to allocate more money toward your savings. This concept could not be truer
than for credit card liabilities. Find a way to reduce or eliminate your credit
card purchases. Few will disagree on the amount of stress credit cards can
bring into our lives. Take control as soon as humanly possible. Transfer
balances from high-interest cards to those with lower rates. Ideally, find a
card with a 0% introductory APR, and pay the balance off in full before the
zero-percent interest clock stops. And seriously consider how your next credit
card purchase will affect your savings plan the next time you feel compelled to
use it.
4.
Fund retirement accounts.
Building a solid foundation for
retirement right now is critically
important. With compound interest rates accumulating over time, until
retirement, the principle amount you have to save today to meet your goals
pales in comparison to amounts you’ll need if you wait. By starting now, versus
the less desirable alternative of waiting, you effectively “automatically”
increase your gradual standard of living simply because of the power of time.
Should you decide that waiting is your only alternative, it is still a better choice
than not investing at all. Realize however, that the time value of money is
extremely difficult to recoup and is a rather expensive missed opportunity. The
amount of money one must invest in order to compensate for a “late start”
increases exponentially over time. Why not act today while you have time on
your side along with the advantage of tax-deferred (and in some cases, even
tax-free) growth opportunities that
comes with retirement accounts?
Put aside as much as possible into your retirement plan at work and at least enough to receive the maximum match your employer offers. Not doing so effectively results in a net loss to your bottom line because you miss out on “reward” money your employer is offering for your commitment to save money for yourself. If you can squeeze out even more money from your budget, contribute to a Roth IRA as long as you qualify for doing so.
Make a promise to yourself and enlist the commitment of your partner to ensure the money you’re saving for retirement won’t be used until then. Sure, you can take money out of a 401(k) or IRA before you retire if you absolutely must, but there’s generally a penalty–and taxes, too–for doing so.
5.
Change your financial mindset.
For some of you, retirement may seem like
such a distant concept. And, for those fortunate to say that, good for you!
Allow it to be a green flag that gives you permission to begin your journey
toward a secure financial future. The sooner you get started, the better off
you’ll be…the further ahead of your peers you’ll be, the sooner you can claim
financial independence, quit your job, spend time with family, play golf, drive
what you want to drive, live where you want to live…how you want to live. By
adopting sensible money habits, conquering your debts, and saving for
retirement early in life, you’ll reap the reward of a secure retirement.
Until next time!
- G -
"Time has a way of reminding us of its perishable nature in the retrospect of our reflections."
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