3 Reasons why Everyone Needs to Save at Least 10 Percent of their Income
There is a lot of great financial advice about cutting costs and increasing your income. However, this won’t help you accumulate wealth, unless you save and invest part of what you earn. People who increase their income without saving anything for themselves wind up churning away on a bigger treadmill, trying to stay ahead of bigger bills. They never get ahead, even after a lifetime of hard work.
Here are three great reasons to save.
1. The Buffer
Let’s face it, life happens. People get sick, their cars break down and they get laid-off at work. In the old days, people saved up money for these types of events. Now, most people try to cover it with a credit card. The problem with this strategy is that credit cards will only get you so far. Sometimes, you need some cold-hard cash to pay the bills. Plus, people are often left with a mountain of debt to climb out of, after a small setback.
Savings are like a life boat on the deck of a cruise ship. Most of the time, you never give them a second thought. But, if you hit an iceberg, they become the most important thing in your life. Make sure you build your financial lifeboat, before you get tossed into the icy waters. Make sure you protect and maintain your savings, so it’s there for you when you need it the most. It brings peace of mind.
2. The Growth
If you tried to save up a million dollars by saving $5 per day, it would take you around 548 years. But, if you invested the $5 per day at 10% interest, it would take you only 42 years. So, it’s not only important to save part of your income, it’s important to invest it wisely. After a couple of years, the growth or return on your savings becomes higher than your future deposits. The initial investment starts doubling and quadrupling, until you have a substantial amount of money.
The sooner you start saving and investing, the more money you will accumulate in your lifetime. If you wait until you are in your 40s or 50s to begin saving, you won’t have enough time to fund your retirement. The higher the return you earn on your savings the faster it grows. That is why it is important to invest your money, instead of lending it to the bank for a pittance in interest. If you earn 1-2% on your money, it may take hundreds of years to save up a million dollars. And, it will be worth much less than when you earned it, because of inflation.
3. The Future
The problem with the future is that it comes whether you plan for it or not. Those who fail to plan for the future must accept whatever the future brings them. By having some savings put aside, you can choose your own future, instead of depending on the government to take care of you. Right now, governments are making promises they know they can’t afford to keep. Look at what is happening in Europe. Look at what has happened in Stockton and San Bernardino, CA. That could be the future for many retirees around the world.
I’m not sure what others have planned for their retirement years, but I don’t intend to be a greeter at Wal-Mart. I don’t intend to work until I drop. And, I don’t intend to eat dog food. I was poor when I was young and I don’t plan on being poor when I get old. I have worked way too hard during my lifetime and I deserve some time to relax and enjoy myself. That is why I have been saving for the past 27 years.
The Bottom Line
The bottom line is that part of everything you earn is yours to keep. If you give your entire paycheck away to others, without keeping some for yourself, you cheat yourself out of your wealth, your future and your peace of mind.
“The art is not in making money, but in keeping it.”
Proverb
Recommended Reading
Financial God – How Gold is Going to Recapitalize the World’s Financial Systems
Financial Samurai – Taking a Leap of Faith and Retiring on my own Terms
Investor Junkie – How to Increase you Income Safely in Retirement
I sure hope everybody saves more than 10%! Save until it hurts a little, or else you’re not saving enough.
Thanks B!
Hi Sam,
It’s pretty impressive that you were able to save 70% of your income for so many years. It probably helps that you are single. Congrats on your early retirement.
Back when I was just starting out with my family, I was lucky to save 5%. As time passed and I got a couple of raises, I built it up to 10%. Now that I make more money and my kids are grown up, I am saving 30%.
Your comparison of saving $5 a day at zero vs. 10% interest is the most startling example of the effects of compounding I’ve ever seen. Wow! Really drives home the importance of saving and devoting time and energy to investing prudently. I’m too lazy to do the math just now, but I suspect saving, say, $10 a day and getting 5% would be equally eye-opening.
Kurt,
Saving $10 per day at 5% interest would take 54 years, if interest was calculated daily. The higher interest rate makes a bigger difference than the higher investment amount, over many years.
That’s why it’s so important to start saving early and get a decent interest rate on your investments.
…and not just 10% of your income, but literally as much as you can! Then you can decide how much of it to spend – and on what.
Thanks for stopping by Drew.
I usually recommend starting with 10%, because most people I talk to don’t think higher amounts are possible. In my own experience, I had to work up to the higher amounts, after I had been saving for a while.
Of course, I support a family of four on a single income. Others, with higher incomes or fewer kids, may have more money available to save.
I always had the savings habit! It helped me considerably in the future. It was the savings that helped me buy my first home, dream home and investing in income property. It helped guarantee my future!
Me too Krant.
I was a good saver as a kid and started up again when I turned 21. It’s a good thing I cultivated the habit before I got married and had some kids. Otherwise, I would still be renting and living paycheck-to-paycheck.
Thank you for the inclusion, Bret. I think one also needs to be responsible with where they park their savings. If they’re only buying up government money and bonds with the savings, they’re just helping to promote the very profligacy on the part of the governments and wall street that tends to bomb the economy every now and then.
Any time FG.
The interest rate is so critical, especially when you consider inflation. The true rate of inflation is somewhere around 5%. So, if you park you money in government bonds or a savings account, it’s a guaranteed money loser, over the long term.