By: Laura Walton AFC®
People don’t do what they can do…because they feel bad about what they can’t do. This was the conclusion of a study of how people give money (charity) but it’s just as true for how people save money. Let me explain –
People in the study were willing to give twice as much when they were told about a little girl suffering from starvation than when they were told about the same little girl along with worldwide statistics about starvation. The reason?
The worldwide statistics made them feel that nothing they could do would make a big difference. “This is such a big problem, is my donation going to be effective in any way?”
Similarly, if we can only save a small amount each month, all too often we don’t bother. We see the goal of saving enough for retirement as unachievable. In fact, we’re not even sure what “enough” is.
It doesn’t help that the press is filled with predictably discouraging stories. A quick Google search finds headlines like “The Scariest Facts about America’s Retirement Crisis,” “Americans Lack Sufficient Retirement Savings in 49 States,” and “The Looming Retirement Train Wreck.”
It’s easy to lose sight of the fact that small savings do add up over time. We don’t hear much about the many families of modest means who save consistently and achieve financial security. The Rule of 72 is key (divide 72 by the rate of return to estimate how many years it will take for your initial investment to double) along with creating a savings habit. In other words, once you can see your savings start to grow, you’re encouraged to build on that success.
$100 saved each month starting at age 25 and invested at 5% yields $144,959 at age 65. Five percent is a conservative return and, realistically, you’ll be able to save more each month as your career advances.
Skipping your Starbucks is the suggestion de jour for saving money but there are as many ways to save as there are financial transactions you make every month. Get creative, keeping in mind that small changes to your spending add up quickly. Your lifestyle won’t be affected much today but it will be a whole lot more comfortable in retirement.
Remember – don’t be put off by what you think you can’t do – just start doing it.