“SAVE MONEY” is perhaps the basic piece of money advice that experts give but a lot of us just don’t do it?
Do you wonder why? I think maybe it’s because saving small amounts of money can feel meaningless.
Let’s make an example. Juan Paolo earns Php 15,000 a month and someone adviced him to save 10% of his salary (the amount that most financial advisors ask you to start with). What can savings of Php 1500 a month do? Would it really make a difference? I guess Juan Paulo would rather spend the money courting girls or watch a movie.
If you save Php 1500 a month and it returns 10% a year, by the end of 40 years, you’ll have Php 9,500,000.
Sounds unbelievable, but it’s absolutely true!
Personal finance gurus illustrate the power of compound interest to encourage you to save money – that with enough time, your little money will grow to great amounts.
But, looking at it more realistically, Php 9,500,000 in 40 years time won’t be as valuable as Php 9,500,000 today.
Have you seen the very first menu of Max’s Chicken on their restaurants’ wall? Before, one can have a whole chicken for only Php 5. Today, a whole Max’s fried chicken is Php 549. This is what we call inflation. Assuming a 3% inflation, the Php 9,500,000 in 40 years only feels like Php 2,900,000 today. Pretty good, ok you’re a millionaire, but is it enough for you to live comfortable through retirement?
(FYI, NEVER listen to anyone that promises or guarantees you 10% return on your investment. That is most likely a scam!)
I Want to be Rich Now! Not in 40 Years!
OK-Saving small amounts of money will not make you rich. The best your small savings will do is to become your emergency fund.
So, why should you save money, if it’s not gonna make you rich anyway? Why not just buy that Starbucks coffee, get the iPhone6 and look cool? Shouldn’t Juan Paulo start saving money when he gets that promotion and when his salary goes up?
Unfortunately, that’s a bad idea.
If You’re Not Saving Today, You Probably Won’t Save Tomorrow.
If you wait to save money – you might never start at all. Most times, people increase their spending as they earn more money. This is called lifestyle inflation and this is how it looks like:
Earn Php 10,000. Spend Php 10,000.
Earn Php 15,000. Spend Php 15,500.
Earn Php 20,000. Spend Php 22,000.
If you can’t save even a little when you’re earning Php 10,000, I’m sure you won’t save money when you earn Php 50,000.
Your daily habits today will determine your future.
The real reason to save money is to help you develop good financial habits. Saving 10% may be a small amount, but it does big changes to you financial lifestyle. Instead of making drastic changes, build your savings muscle slowly by making small adjustments over time. And then someday when you earn a lot more, you’ll be strong enough to manage that money properly.
REMEMBER- Make saving a part of your lifestyle. Even if you’re not able to save a lot of money, do it anyway.
photo credit: You’re Only Human via photopin (license)