Why is it hard to save money?

Let’s face it. Saving money is HARD. I talk about the emotional journey and mathematics behind saving for your goals.

I’m trying to teach my six year old son the value of money. One day, he saw this helicopter toy at the store and had to have it. It was a bit of a crisis (understatement) when I informed him that he could buy it but would need to use his tooth fairy money.

I’m a CERTIFIED FINANCIAL PLANNER™ so I had him account for the cash in his giant Crayon piggy bank and plan for his purchase before we left. When we arrived at the store, he saw the NERF aisle and forgot about the helicopter. We ended up spending more money on the NERF gun even though he was saving for a Paw Patrol toy.

Why was it hard for him to reach his goal? Emotions! … and cool NERF guns.

Let’s talk about why it is hard to save money because of the different emotions we experience along the way.

Stage 1. I’m a savings machine…

It feels good to start saving. Almost like when you floss because you know the dentist would be proud.

  • Seeing the 401k balance grow. Getting that employer match is fun.

  • Opening a brokerage account. Getting your first stocks. I’ll never forget the first stocks I bought on Scottrade.

As you save, we find that people believe savings will accumulate quickly in a linear fashion like the chart below. It is the common knowledge that shortest distance between two points is straight line.

For example, if I need ~$7M in 45 years, the money will grow each year in a straight line until it gets to the $7M

Most People Think Money Grows Like This

  • Balance
Illustrative Only. Money does not grow in a straight line like this. $7M goal divided by 45 years

Stage 2. I’ve been saving for a number of years and I’m still not close to my goal. Why am I doing this again?

After you save 10 - 20 years, you may find that you are not seeing the growth you expected and may feel behind

Then THE BIG MISTAKE happens. You make a change like this:

  • You dramatically increase the riskiness of your investments to “catch up”. If that risky investment fails, it takes savings backwards.

  • You stop saving and buy the “NERF gun” of your dreams (German car, second house, etc.).

  • You sell everything so you can save MORE.

For our example, let’s assume you continue saving and see what happens.

Stage 3. Powering On. Compounding Finally Kicks In

Once you approach the back half of the chart, compounding growth finally kicks in and your money starts to grow exponentially. Compounding is just a fancy finance word for intense growth.

For the same example where our goal is $7M, this is how money actually grows when you save and invest over time.

How Savings Actually Grow

  • Balance
Illustrative Only. Saving $10,000 annually @ 10% annual growth. 10% may not be achievable

By year 20… contribute $10,000. Balance grows by ~$61,000.

By year 30… contribute $10,000. Balance grows by ~$158,000.

By year 40… contribute $10,000. Balance grows by ~$411,000.

Eventually, your contribution is small compared to the growth and you can essentially stop saving because the contribution is so small compared to the growth.

In Summary

Saving is hard because of the emotions you feel along the long road to your goals. If you would like to discuss your situation. Please book a FREE call with us today