Morning! Today I want to show you a very simple thing: there is no ridiculous amount in savings. $10 per week can add up to a great deal of money over the long term. Yes, it won’t be sexy at first, but with the power of compound interest it can help you build a serious nest egg.
Let’s say you make $2,000 per month and invest over your 40 productive years the same portion of your income at a 6% rate of return. All figures were calculated here, you can also tick a box to adjust each year’s savings with inflation.
At 4% savings rate you save $80 per month and will have $160,115 in 40 years for $38,400 invested
At 10% savings rate you save $200 per month and will have $400,289 in 40 years for $96,000 invested
At 25% savings rate you save $500 per month and will have $1,000,724 in 40 years for $240,000 invested
At 50% savings rate you save $1,000 per month and will have $2,100,448 in 40 years for $480,000 invested
At 75% savings rate you save $1,500 per month and will have $3,002,172 in 40 years for only $720,000 invested! How would you like a free $2,300,000???
Now let’s assume a safe 4% withdrawal rate to see what that money will buy you.
At 4% savings rate your nest egg will produce a monthly income of $533. Since you live on $1,920, it is not enough to live on. Use all your nest egg and you can live for 7 years.
At 10% savings rate your nest egg will produce a monthly income of $1,334. Since you live on $1,800, it is still not enough to cover your lifestyle. Use up all your nest egg and you can live for 18 years.
At 25% savings rate your nest egg will produce a monthly income of $3,335. Since you live on $1,500, you can live forever. Or, to generate $1,500 per month, you will need a $450,000 nest egg that you will have achieved in 29 years.
At 50% savings rate your nest egg will produce a monthly income of $7,001. Since you live on $1,000, you can live forever. Or, to generate $1,000 per month, you will need a $300,000 nest egg that you will have achieved in 16 years.
At 75% savings rate your nest egg will produce a monthly income of $10,007. Since you live on $500, you can live forever. Or, to generate $500 per month, you will need a $150,000 nest egg that you will have achieved in… 7 years! Learn to live on 25% of your income and financial independence is only 7 years away!
Those calculations do not take into account inflation, but it does not consider your raises at work that will make up for it. The 6% rate of return is lower than the usual 7 or 8%
You can see that going from $80 per month to $200 per month in savings (4% to 10% savings rate) makes a HUGE difference on your financial future. What is an extra $120 per month? $30 per week, just over $4 per day. Maybe it is the interest you are paying on some debt, or the daily indulgence you don’t notice anymore but won’t give up. It can also be, quite easily, the amount of extra income you could bring each month. How? I talk about it on Make Money Your Way. There are plenty of ways to make $120 per month. A couple of nights of baby sitting per week, a student you could tutor on Wednesday, pet sitting, dog walking, house cleaning, taking a paper route, a night shift at a local bar once a week, making a couple of extra hours… It is really feasible for the majority of you. We are not talking thousands, just $4 a day. If you earn it, you won’t even have to change your habits, your lifestyle or your luxuries.
Rather than learning to live on $500 per month like the 75% savings rate example, you can decide to make more. Keep your $2,000 monthly lifestyle and make an additional $1,500. Yes, that is harder, much harder than the $120 we were just talking about. But your $2,000 job can give you a 2.5% raise every year. That is $50 taken out of the way. You can train to become a better employee and get a real promotion. Start a side business, and so on. If you keep living like you are today, like you currently like to live, and squirrel away any raise, windfall or extra income, you can reach really easily the next rate of savings.
This post was featured on the Evolving Personal Finance, Mom and Dad Money, Common Cents Wealth, Outlier Model, Sense and Sensibility, Chance with Finance, Control Your Cash, Sweating the Big Stuff, Carnival of Financial Planning, Festival of Frugality, Cash Funny, thank you!
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