QUESTION: I have a young family and I want to be able to provide for them the things I didn’t have growing up. I also know that saving money is important. But can I just save more later so that I can spend more on my family now?
ANSWER: Your heart is in the right place, but your understanding of how money and human nature affect one another may need a bit of remedial work.
You can never get Today back.
So I love that you want to provide for your family today, while you have your children under your roof.
But…you can never get Today back.
This also means that the saving you are not doing today will be much harder to make up tomorrow. Why? The math is against you. But so is your own human nature.
The only way to make up for the saving you aren’t doing today is to either save more, earn more on your money or work more, pushing back Tomorrow even farther into the future.
If a 25 year old started to save $2,000 per year, earned 5% on his investment, and did so for 40 years, he would have about $250,000 at age 65. If he waited until he was 35 to start that same $2,000 per year savings habit, he would have about $140,000 at 65. If he waited until he was 40 to start, he’d only have about $100,000 at retirement.
Can the 35 year old simply save more to reach the same $250,000 by age 65? Sure. He’d have to save not $2,000, but about $3,600 per year.
Could he do better with a higher rate of return? You bet he could. Our hypothetical late-bloomer 35 year old could save the same $2,000 per year as his 25 year old counterpart and have the same $250,000 by age 65 if his investment earned about 8%. That may not sound alike a big difference, but it represents a significant increase in risk – which presents a much greater opportunity for loss (as well as for gain).
Finally, our 35 year old late-saver could simply work longer…to age 75…and save at the same rate as his 25 year old friend for 40 years.
So, when confronted with the above choices (save more, work longer or try for a higher rate of return), which do you think he’ll go for? Higher return every time! You see, this isn’t really a math problem, it’s a human problem. And human nature (without significant push back) will choose the easy way out every time. But that’s also the riskiest and least sure path.
By the way, when does later come?
Right now, you have small children. Will they get less expensive to raise as they age? Do you plan to help them pay for college? Might they have a wedding to pay for one day? And those cute little rug rats could even grow up, get married and give you second generation rug rats – cuteness compounded! Is there a possibility you’ll want to spend money on them?
I know you don’t have enough money for today. I believe you.
What you must understand is that you will never have enough. There will always be “necessities” crying out to be bought, rented or leased. And every one of them will whisper in your ear, “You can save for tomorrow…tomorrow.”
The truth you can avoid but never escape is that when you fail to save today, you are robbing your tomorrows to fund your today.
The solution is BALANCE within a PLAN.
BALANCE means taking advantage of every opportunity for good that Today offers you, without robbing Tomorrow of its rightful resources.
PLAN means identifying and prioritizing that which is most important to you and allocating dollars in proportion to those priorities.
You only get one Today. Live it to the fullest. But by use of a balanced plan, teach it not to steal from Tomorrow.
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Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.