My son, after graduating from college in May, will start his first job in a few weeks.
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 next 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 between now and 2062. If he does, the difference will be even larger.
My son understands the power of compounding and even started reading 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. Insurance, utilities, phones, rent or a mortgage, groceries, gas and transportation… These days, there’s a lot less left over after you pay the bills. 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’ll make 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 the 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.”
My son hasn’t filled out his paperwork yet, so I’m not sure what he’s going to decide. But maybe if he finishes Get Rich with Dividends and sees just how big of a difference every dollar invested makes, he’ll make the right choice.
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. Giving them that gift will be the one that keeps on giving for the rest of their lives.