Start Off On The Right Foot

Tip #272 - Start Off On The Right Foot. First, two quick notes - sorry about the lack of posting. All I can say is that I'm not as organized as I could be and the start of school is crazy! Second, this post is not meant to make people feel bad about getting a late start to finances, it's meant to encourage people to start early.

For those of you who went to college, think about the grades you got the first semester. You had your semester GPA and you had your cumulative GPA. Your semester GPA WAS your cumulative GPA. So if you got a 3.8 the first semester, your cumulative GPA was a 3.8. When second semester grades came out, they counted as half of your cumulative GPA (assuming you took the same number of credits as the first semester). So if you got a 3.4 then your new cumulative GPA is a 3.6. The first semester of your sophomore arrives and you get a 3.6. These grades contribute toward one-third of your cumulative GPA (again assuming an equal number of credits as each of the first two semesters), and you still have a 3.6 GPA. For the remainder of your sophomore year, your whole junior year, and your first semester senior year, you get a 3.6, a 3.4, a 3.8, and a 3.6 semester GPA, respectively. Now it's your last semester of your senior year, you have maintained a solid cumulative 3.6 GPA up to that point. And you slack off the last semester and get a lousy 2.0! Aaahh! How will that effect your cumulative GPA? Surprisingly, not that much. Your cumulative GPA is still a respectable 3.4.

Do grades in the early years of college count more than grades toward the end of college? No, of course not. Each semester counts 1/8 toward the total. But as time goes by, each semester's GPA contributes a smaller proportion toward your cumulative GPA (as earlier semesters' GPAs do as well). Let's look at this scenario in reverse. Suppose the college student started out with a 2.0 first semester. If he wants to graduate with a cumulative GPA of 3.4 by the time he graduates, he needs to buckle down and get a solid 3.6 GPA's each of the remaining semesters. Sounds hard, doesn't it? It can be done, but psychologically, it's harder because he's starting low and needs to improve.

How does this apply to finances? Saving money is similar to that cumulative GPA. How well you do early on sets the stage for the rest of your saving years. And it's even more dramatic because the early savings has time to compound its earnings. We've probably all heard those financial scenarios. If you put $100 away per month for 10 years in an account earning 3% interest and then do nothing for the next 20 years, you will have over $25,000.* If you wait twenty years until you start saving and put away $100 per month for 10 years you will have just under $14,000.* (The amounts are more dramatic with greater interest rates and/or longer time periods.)

In other words, sacrifice a bit now to put away savings in order to be able to sit back and not worry about it later. It's very easy to put off your savings for when you think things will get better when you are older or when you will be making more money. But why not start now, and if you are in a position to save later on, then by all means do it. But if you aren't, at least you can fall back on what you have already done. If you already have many years behind you where you weren't saving, then start now. The sooner you do it, the greater your cumulative worth will be. (And if you are responsible for a young adult, stress the them the importance of saving early. Starting them off on the right foot will set them up for many years of savings.)

In Real Life (IRL) - When I graduated college and was living on a meager salary, I managed to put away a couple hundred dollars per month, even though at the time there were plenty of other things I could have done with the money - live in a nicer apartment, live without roommates, go out to dinner more, etc. My dad taught me the importance of savings, so I stashed away that savings month after month after month. Then 12 years later when I had my first child, I stopped working (for pay), and stopped saving. That was 9 years ago. Back then in my imagined, perfect life I had planned to go back to work after 5 years and start saving again when my (not yet conceived) second child was 3 years old. In my reality now, my third child is now 3, and I still haven't gone back to work.

That savings I did for about 12 years has allowed us to make a decent-sized down-payment on a house and allowed us to do a 15-year mortgage. It also allowed us to have an emergency fund available and for me to be a stay-at-home mom. (Other things also contributed.) The fact is my early savings has paid dividends both literally and figuratively. Psychologically, it has been freeing knowing that we have that money there for emergencies. Financially, it has allowed us to pursue other savings opportunities more freely - like putting money for college and retirement. Personally, it has allowed us to pursue other things we wanted like staying home with my children.

This in no way is intended to sound like bragging. Believe me, I know I started out ahead of many other by financial benefits my parents gave me (I had no college or car loan when I got out of college.) Instead, I want to point out how freeing it was to save early when I really didn't have too many financial responsibilities. Back then the financial decision I made was whether to share an apartment with a roommate or to put away $200 per month. If I hadn't saved, my decision now would be do I put away money per month or do I pay for my child's braces (sorry, honey, crooked teeth are in style).

If you haven't started on a savings plan yet, don't despair. Now is the best time to get started. Think about what sacrifices you can make. If the sacrifices are still relatively easy (put away $50 per month versus eat out once per month or put away $100 per month versus take a beach vacation) then make them. It's better than the alternative decisions you might have to make down the road such as looking for a second job at age 70 or not be able to pay your rent. It's not too late to start off on the right foot.

*I used bankrate.com to do my calculations.

For other ideas on saving money, check out Frugal Friday over at Life As Mom.