A few years ago, my son had just graduated from college and was getting ready to start his first job.
We were talking about his benefits, and, being my son, he volunteered, “Of course, I’ll contribute to the 401(k).”
When I asked him what percentage of his paycheck he planned to contribute, he told me he would maximize the company’s match, which was in the mid-single digits. Solid choice.
I countered, “Can you afford 10%?”
His brow furrowed at the prospect of more of his spending money being locked up for the next 35 or 40 years.
I ran the numbers. Assuming he earned 8% per year on the money, if he increased the contribution to 10% just for the first year, he’d have an additional $93,000 in 40 years.
If he maintained the same 10% contribution each year, never increasing it, the difference would be $1.4 million. Hopefully, he’ll get a few raises over the next several decades too. If he does, the difference will be even larger.
My son understands the power of compounding and has read my book Get Rich with Dividends.
Yet even this well-educated kid (he’s not really a kid anymore, but he’ll always be my kid) – who’s the son of someone who constantly professes the power of compounding – hesitated when faced with the real-life decision of saving more versus having funds available.
It’s hard. Life is expensive. These days, many folks are struggling to pay for insurance, utilities, phones, rent or a mortgage, groceries, gas and transportation, and more. Then, if you actually want to go out to dinner once in a while with some friends or see a show, there’s not much left over for savings.
I get it. But by making some sacrifices today, you (and my son) will be in much better shape several years from now.
Adjusted for inflation, I was making less than half of what he’s making when I was his age. Yet, also adjusted for inflation, my rent was the same.
It was a big struggle that involved many dinners of homemade spaghetti with butter and salt, but I managed to contribute the maximum to my IRA back then. And despite making many questionable choices in my early 20s, I frequently thank 22-year-old me for those sound financial decisions that helped set me up for where I am today.
Saving and investing are difficult in the face of so many necessities and wants. But investing just a few extra percentage points of your income every year can drastically change your financial life.
And that’s still true whether you have 40 years or four years to save.
In the history of the world, I don’t think there’s ever been someone who’s said, “I wish I’d saved less.”
Be sure to teach your kids and grandkids the power of saving and compounding so that they’re in good shape when they get older. It’s a gift that keeps on giving for the rest of their lives.
When I started working for GE my father told to join their savings and security plan and put as must into it as possible. When I left GE 25 year later I had over $750K and a pension. Thank you Dad
Richard D.
The one piece of advice I recall hearing when I was growing up was “Unless it’s for a house or a car, you don’t borrow money. If you can’t afford to pay cash for it, you don’t need to buy it.”
My moto is “Don’t look at things you can’t buy and don’t buy things you can’t afford.” Always pay cash when you can so you don’t pay interest. My first house was at 18% interest and then you could do rate deductions when the interest rate dropped which aren’t available anymore. I paid it off in less than 20 years but in that 20 years we added 24X36 addition and a 7 stall garage, paying cash for all. I am now happily retired and debt free. In those years I also raised 2 sons with learning disabilities, a real challenge when you are running a business and keeping a house. They are both business owners and doing well. Mission accomplished!
Actually the same, invest through the company’s 401(k), straight out of college. I delayed five years to do so, but glad I at least started when I did!
Here are the top three. “It’s not how much you make that matters, it’s how much you save.” “Don’t buy an expensive car, buy stock in the manufacturer.” Don’t worry about the furniture and decor, buy the house.”
Hello Mark,
Dad told us kids (7of us) the best investment on earth is earth,
I worked as a shearer for 5 years, my wife and I saved enough to lease a rough block of land on which we ran sheep
We borrowed almost all of the capital to start off.
We leased farming land for 7 years, saved a deposit to start paying off our first farm.
After 37 years we had bought 6 farms and sold 5.
The capital gain was huge calculated at about 25% per year as land prices kept on increasing.
Our son his wife, grand son and his wife are farming land now worth 50/60 million.
Land investment was good for us.
Thank you, and kind regards
David
Saving 10% of my income.
Unfortunately, I didn’t get any good advice about saving for the future. Other than “Put some money in the bank”. When my 401(k) kept going down instead of up, I looked up self-directed IRAs. I asked my tax guy and he stated I should do my research, and if I was going to buy stocks, look at Dividend Aristocrats and buy solid dividend payers. I also read “The Intelligent Investor” and “American Jubilee”. “Get Rich with Dividends” has helped tremendously. Let the DRIP do the work. Even with the market looking like a bad EKG, I’m still up 50 grand. The government won’t take care of you. YOU will take care of YOU.
In 5th grade our elementary school had a bank come into our classrooms and we could start a savings account with 50 cents every week. The bank sent someone every week to collect our savings envelopes and account book. This was in 1955. I saved from 5th grade to 8th grade and left that money in until I entered college in 1964.
They started my life commitment to save regularly.
My mother always said “10% of all you earn is yours to keep and pay yourself first”. didn’t often follow her advice but once I did, amazing things happened!!!
Appreciate your advice.
Marry young, have children, a lot of them, and save, save, save & teach them the same!
In the 6th grade I had a teacher, Mr. Finger who gave each student $1000 in Monopoly money & we had to buy 5 stocks & plot the prices every Friday to follow them & to help us learn our fractions as then the prices were quoted in fractions. This was in 1959. Not only did I learn my fractions but learned about compounding & found that the students who bought & held did better than the students who were constantly buying & selling. It was one of the most practical classes I ever had & made me a holder of great companies & allowed me to have a portfolio that is eight figures today @ age 79. Also the teacher became a principal & eventually a district head. The class probably did more to shape the person & investor I am today than even all my college & medical school classes.
Way to go Mr. Finger. I love stories about teachers who made a huge impact (my parents were teachers)
Another similar piece of advice from my father, never spoken but delivered by his actions: “Only borrow money to make money.” He only borrowed to buy cattle or land.
Marc,
I have always advocated that a good option is to save half your age. When you are young your income is limited and demands for it are large relatively. Saving for a house, buying a car, perhaps marriage and kids are costly against a yet developed income stream. By saving half your age, 10% at age 20, 20% at age 40, etc,, your saving grow as your income does and the demands on it level off or even reduce. I’ve followed this approach and retired at age 58 and now have more than I can spend in my lifetime. Good investing.
Bob G
If you can’t afford it, don’t buy it.