Not too long ago I was having coffee with my friend Lily at a local coffeeshop. During our conversation we got on to the topic of finances. We were discussing the expensive cost of living in the Washington DC area and how money and a higher income just doesn’t seem to go very far here. Casually she mentioned that she and her husband Tom make contributions to their retirement accounts and their kids’ college savings but outside of that not much else is left over at the end of the month. This is a successful family, at least from an income standpoint – Lily is a corporate sales executive and Tom is a federal employee; they have a healthy household income but together they only save about 5% of their household income. To learn they weren’t putting much toward building longer-term wealth was concerning and she immediately recognized it from the look on my face. 'Isn’t that going to be enough?’ Lily asked, 'With the cost of housing and the kids activities there just never seems to be anything left at the end of the month’.
This is a familiar scenario for many families and it usually takes some kind of unforeseen event or a similar discussion to create a real awakening and awareness. The answer to Lily’s question ‘Isn’t that going to be enough?’ — well maybe, but it’s certainly not enough to create true financial freedom and live their family's dream.
The good news is that by establishing priorities and discipline we are often able to find extra money to put toward our long-term goals, and as I’ll show you from the following examples, small amounts really do add up over time.
Let’s say you make $150,000 as a family and are saving and making monthly investments over a 20 year time period. We’ll look at various scenarios in which we base our savings and investment amount as a percentage of household income and assume a moderate rate of return at 8%.
- 5% of income equals $7,500 annually, if we save and invest monthly and earn 8% annually, in 20 years we will have $368,137.76
- 10% of income equals $15,000 annually. If we save and invest monthly and earn 8% annually, in 20 years we will have $736,275
- 11% of income equals $16,500 annually. If we save and invest monthly and to earn 8% annually, in 20 years we will have $809,903. This equals a 10% increase in assets over the example using a 10% savings rate.
- 15% of income equals $22,500 annually. If we save and invest monthly and earn 8% annually, in 20 years we will have $1,104,413.28. That is a 50% increase in assets over the amount we have by investing 10% of our income.
There is a wide margin in the amount of assets you end up with in the 5% and 15% scenarios, and that is because you are saving 3 times the amount each year. But what’s eye-opening in looking closely at the numbers and scenarios is that you can see each 1% increase in savings and investment leads to a 10% increase in assets over the 20 year time period.
I’ll save more when….
As our conversation went on it was clear Lily had fallen into a common thinking trap to justify her family's lack of saving. She said to me, ‘I’m going to have a big year of sales this year and then we’ll be able to max out our retirement contributions and get back on track’. The fact is she and Tom didn’t want to dig in and do the dirty work of making choices and establishing priorities. 'I’ll save more when’ is a dangerous type of thinking and at the core it’s simply a form of procrastination - I’ll save more when I take that big job and we make more money, I’ll save more when the kids are out of daycare, I’ll save more when little Johnny’s Spanish lessons come to an end next year, I’ll save more when we finish paying for the kids college, I’ll save more when we get the car paid off. The truth is, there is always another expense to step in and take place of the previous one.
Finishing our coffee, we realized that we had touched on difficult work. Deciding it was important as well, we set up a quarterly coffee & accountability meet up to work as accountability partners to share challenges and review progress. In the meantime Lily is going to take a really deep look at their household expenses.
Prioritizing spending and making changes now can make a difference over time, even the small amounts add up. Find your accountability partner and get to work on your goals today.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This is a hypothetical example and is not representative of any specific investment. Your results may vary.