It is one thing to create a sense of urgency about the need to save money. It is another thing, and an important priority for me, to motivate people to WANT to save money. To do this, my goal is to help people conclude for themselves that they should save.
Why should we WANT to save money? The short answer – money can grow due to the miracle of compounding! A slightly more detailed answer, and frankly an epiphany for some people, is that we should view this growth potential in money not as a luxury or bonus, but as a necessity. We need our money to grow because when you add up all of the many future financial needs and demands of life events, most of us unless we have a very high income or win the lottery (that was a joke, please don’t waste money on the lottery), will not be able to set aside enough money to fund all future financial needs. Again, we need our savings to grow!
I’ve observed that one reason few people engage financial literacy platforms is that they are turned off by or intimidated by math. Therefore, I steer more towards story-based lessons. But, here, talking about growth due to compounding, we need a little bit of math.
What do we mean by compounding? Einstein called compounding the eighth wonder of the world. The best way to envision compounding is that ‘your interest earns interest’. Assume you start with $1000 and, for the sake of easy math (but acknowledging it is a high return assumption in the real world), it earns 10% a year. At the end of year 1, you have $1000 X 1.10 = $1100. What about year two? In year two, not only does your original $1000 earn another $100. But the $100 gain at the end of year 1 earns money too. Your earnings earn money.
Without getting bogged down in the underlying math or assumptions, it is reasonable to assume that money can double every 10 years (money has to grow at 7% per year to double in 10 years). Think of that – If you save $1 by the age of 30, it can become $2 by the age of 40, $4 by age 50, and $8 by age 60. If that $1 at age 30 was $10,000, well you get the idea. This is exciting, life-changing growth!
Can you guess the next lesson I want to convey? START EARLY! Since money can grow, it is in your best interest to start that growth as soon as possible. The people who get the ‘extra doubling’ (because they started saving early) truly stand a chance of achieving their financial goals which may enable them to take more control of their lives and really unlock their potential.
I’ll conclude with a quick aside, for some terminology, and a disclaimer: Remember, my focus is on helping people save money. Saving money is setting money aside for the future. Investing, on the other hand, is taking some of your savings and trying to grow it to meet future needs. You have to save before you can invest and not all savings are invested. Some savings are ‘spent’ money (e.g., needed for a near-term repair, imminent tuition bill, or event). Investing pursues growth but growth is not guaranteed so savings that are needed in the short-term should not be put at risk in investments seeking growth. My disclaimer is that I don’t give personal investment advice.
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