Monday, September 7, 2009

Savings Can Add Up Quickly

Saving Money Tip #184 - Just Like Debt Adds Up Quickly, So Can Savings. Some people spend money so freely that at the end of the month or the year they have little savings to show for the money that they made. "Where did the money go?" They ask. "How could I have accumulated so much debt?" As an outsider looking in, it’s usually easy to figure out where the money went. The weekly shopping trips to the department store to buy clothes, the monthly hairdresser visits, the weekend visits to the home improvement stores, or the twice-weekly take-out meals can add up quickly. Fifty dollars here and $100 there add up very quickly. Before you know it, there is a $500 credit card bill waiting in the mail.

Suppose we did something different with that $500 and instead of using it to buy things, we put it in the mail to a savings account with our name on it? Where would you be at the end of the year? How about at the end of three years? Well, with $500 monthly being sent to a savings account, you would have $6,000 to your name at the end of the year. After 3 years you would have $18,000 to your name. And that is assuming you are not earning interest. It adds up that quickly – in three short years you can easily accumulate a fair amount of money. Once you get used to sending a certain dollar amount each month to your savings account it becomes like another bill that you have to pay. Except at the end, all of the money you sent belongs to you! It sounds good, doesn’t it?

Now of course, not everyone has $500 available each month to send to a savings account with his/her name on it. But there is no reason that most people cannot find $100 to send away each month or even $50 – that’s less than $2 per day. Make it part of your routine, and you will see how easy it is to build up your savings.

In Real Life (IRL) – About a year out of college, I started mailing $250 per month to a mutual fund. Once I started doing it, it became routine to me and was like any other bill I put in the mail – rent, utilities, car insurance, etc. I think I did this for about 10 years until I got married. After that 10 years' of savings, I had about $50,000 total in two different mutual funds. (I can’t remember if I contributed the same amount month after month or if I changed it at some time.) Regardless of whether I had just sent it to a savings account rather than a more sophisticated investment or if the mutual fund performed well or not, the point is I put away a lot of money. Even without any interest or compounding, 10 years' of saving $250 month after month, I would have still had $30,000 stashed away. That’s how quickly savings add up. Had I been putting that $250 toward clothes and shoes each month, my money would be in my closet right now - out of style and collecting dust, I might add.

So if you are having trouble getting started on your journey to financial stability, take this one small step. When you receive your paycheck at the beginning of the month, immediately write out a check for $100 or $50 or even $25 and send it to a savings account with your name on it. You are paying yourself for all of the hard work you do. Start doing this on a monthly basis. As your savings accumulate over the months, you may get motivated to send even more away each month to an account with your name on it. And at the end of the year or three years or five years, you will be amazed at how quickly your savings will grow.

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