We’ve all heard it before: start saving early in life for retirement. Although its easier said than done, we must learn how to dicsipline our spending from an early age. Every dollar we spend today is really costing way more down the road. Similarly, every dollar we spend now means we have much less to spend later. Not sure exactly what I mean? Check out this staggering example.
You invest 1 Canadian Dollar on your 15th birthday. The investment pays an annual interest rate of 10% compounded monthly. 50 years later on your 65th birthday you are ready for retirement. How much is that 1 Dollar investment now worth? $145.37… Unbelievable!
I know what you’re thinking: 1 dollar today will be worth nothing 50 years later due to inflation. True, this must be taken into account. Lets assume the %4.09 average rate of inflation throughout the 50 year period between 1959 and 2009 in Canada. 1 “1959 Canadian Dollar” would be worth 7.44 “2009 Canadian Dollars.”
So back to our example. Dividing 145.37 by 7.44 equals 19.54. This tells us that our investment, even after inflation, has still grown by over 19 times!
Let me say it again. Every dollar we spend today is really costing way more down the road. Similarly, every dollar we spend now means we have much less to spend later. This is true thanks to the power of investment and compound interest. Understanding this will make you think differently about that $1.50 Tim Hortons Coffee, or those $20 shoes that are on sale. You’ll think, wow if I pass on that $1.50 coffee and invest the money instead, I will have an additional $218.05 to spend when I’m retired.
There is a very valid argument that is quite common against this way of thinking. Many people spend money to enjoy it today, in their youth, knowing that there is no guarantee of a tomorrow. They seek instant gratification from their hard work in the form of a unnecessary purchase. They live from paycheck to paycheck, and preach “you can’t take money with you when you leave this Earth. Besides our health may be suffering in later years.” This is all admitingly very true; there are no guarantees in life. There is inherent risk in saving for a better tomorrow; it takes foresight and discipline. Unfortunately, this way of thinking makes you a perfect candidate to fall into the “financial trap”
The financial trap is the perpetual cycle of spending every cash dollar you make, and possibly more than you earn via credit.
The financial trap is a viscious circle that guarantees 1 thing: you never get ahead. You work so hard, take care of your necessary expenses, then blow the rest on wasteful purchases. Further worst, the trap can get really ugly when you start purchasing on credit. Interest payments in the 20% range for consumer credit cards can quickly eat away at your paycheque. If spending habits are not changed, a financial spiral out of control is imminent.
How can we avoid the financial trap? Do we need a great job earning $500000 annually? No; keep your existing job if you are content with it. In fact, you don’t have to work 1 Joule harder. Everyone can do it: simply live below your means and invest the difference. Keep your necessary expenses as low as possible, and cut down on wasteful purchases. The key to wealth is to consistently move upward and forward - never downward and backward. Getting ahead in life is hard enough, so don’t sabbotoge your own financial future through wasteful spending.
The moral of the story ties everything together. Turn wasteful spending into investments, and the rewards will be tenfold. Hold off on that fast food today, and you can buy a McDonalds tomorrow. If its you’re goal is to travel once every year, consider working hard for 5 years without travel: this may enable you to take 2 vacations per year for the rest of your life - a large difference at the end of the day. Pass that purse sale without second thought. Years later, you will get the exact same one packed full with cash. Avoid the financial trap: Save & Invest today to reap the financial freedom tomorrow.
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