When it comes to money, “doing less to build more” looks a lot like discipline, because spending less now builds more later.
Like so many high reward things in life, long term financial gains only come after short term sacrifice.
As I mentioned in our personal story, I wish we had spent less five years ago to have more now.
We’ve changed our habits considerably since then, in part thanks to Dave Ramsey’s Financial Peace University.
The first lesson in Financial Peace University covers saving. Have you heard of compound interest? As Dave says in the lesson, people shouldn’t be able to graduate high school without understanding how it works.
In case you’re like most people and didn’t learn this magical math problem in high school, here’s an example from FPU to illustrate it:
(Bear with me on the math. It’s the fun kind!)
Ben starts investing at age 19. He invests $2,000 a year for eight years and then doesn’t save another cent after that.
His counterpart, Arthur, starts investing at age 27 and puts away $2,000 a year until he’s 65, but he never catches up to Ben.
Even though Ben invested far less of his own money, compound interest worked in his favor to yield $2,288,996 at age 65.
Arthur still did really well, but his total at age 65 was $700,000 less than Ben’s, even though he had put in $60,000 more than Ben. (If you’re a visual person, check out this blog post for a chart illustrating Ben and Arthur.)
The takeaway: start early. Even when you’re young and don’t earn much, nothing is more valuable than time on your side.
It’s the difference between working hard and working smart. Investing earlier turns less money into more than you’d have if you’d started later.
It looks beautiful on paper, but it gets messy in real life. Investing money for the future means not spending that money for today’s enjoyment.
Now for a tangible, personal example. Early in our marriage, we paid $100 a month for cable and a Blockbuster subscription (back when Blockbuster had a similar program to Netflix). Now we pay $8 a month for Hulu Plus, and about $2 a month to Redbox.
Let’s say that we saved the $90 difference for one year (most of which I was unemployed). We’d have saved $1,080.
If we had invested that money alone until I turn 65, it would grow into $71,565.20, even if we didn’t add a penny to it! (I based the calculation on an average 10% rate of return, which is reasonable to expect from a good mutual fund.)
I’m not a math person, but even I can get excited about cutting my cable bill when I see what that money can do long term. What if we kept adding to that investment every year?
(Side note: the cable bill is just an example. I’m not anti cable. Maybe you love cable and want to sacrifice a few Starbucks or Target trips or something else instead.)
Small sacrifices can really add up. Even if you start late, starting now beats starting never.
You may not be money motivated, but paying attention and managing it well are an expression of gratitude.
What small changes have you made, financial or otherwise, that have made a big difference?
This post is part of a 31 day series on “doing less to build more.” To read the other posts in this series, click here.