Saving for retirement and the benefits of short-term sacrifice
Putting money aside for the future takes time, patience and discipline.
If you had $10,000 to invest right now, you could double your money in twenty years without adding a single penny to it. You would just have to find an investment paying at least 4 percent interest that is compounded annually. However, most people do not have $10,000 to invest. In fact, 39 percent of people surveyed either could not come up with $2,000 for an emergency or did not believe that they could, according to the National Financial Capability Study (NFCS) for 2015, co-released by the Financial Industry Regulatory Authority (FINRA) and the Global Financial Literacy Excellence Center. How much do you have? Do you have $10,000 or $2,000? Could you come up with $500?
If you set a goal to save $500, how long would it take? Would it take 10 months? 5 months? Could you sell something and put aside $500 right now? If you invested only $500 right now and earned at least 4 percent interest compounded annually, in twenty years you will have $1,095.56. You would double your money. But wait, how much can you add to the investment every month? How much are you willing to sacrifice? For example, would you willing to drive a “clunker” to work every day?
According to an Edmonds.com article, the average monthly car payment for a new car is $483. The average used car payment is only $122 less at $361. If you were willing and able to sacrifice that new or used car payment for now and invest it in your future, what would it look like? Using the $500 initial investment and adding $400 (let’s split the difference) per month to it for 20 years compounded annually at 4 percent interest, your balance would grow to $151,891.75.
A short-term sacrifice can pay big dividends later. If you are twenty years old and start your savings, you may have forty or fifty years to build your nest egg. If you are fifty years old, you can sacrifice now and have a substantial amount saved by the time you retire. If you go to Investor.gov , there is a Compound Interest Calculator that is very helpful. You put in the amount that you can invest now, the amount of your monthly investment and your expected interest rate to discover how much your money will grow based on the power of compounding the interest. The calculator assumes reinvestment of all interest earned.
Many will make big monthly payments to buy the things they want now like the new or newer model cars, even though the value of the car goes down drastically within a short period of time. However, sacrificing some things you want now and saving for what you need in the future can provide great benefits and satisfaction. See my article “How much money does it take to retire” for more information on matching needs with available resources.
Making financial changes takes time, patience and discipline. Sometimes it helps to have help from a professional.