Why is saving money challenging? Emotions!
Saving money requires effort, patience, and discipline over a long period of time.
Let's explore why saving money is difficult due to our emotions.
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.
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Seeing the 401k balance grow. Getting that employer match is fun.
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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.
For example, if I need ~$7M in 45 years, people think the money will grow each year in a straight line until it gets to the $7M.
We run into this mindset often and I'll tell you why its flawed.
Most People Think Money Grows Like This
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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 may make a change like one of the options below:
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You dramatically increase the riskiness of your investments to “catch up”. If that risky investment fails, it takes savings backwards.
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You stop saving and buy the <insert expensive thing here> of your dreams.
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You sell everything so you can catch up on your savings. You move into a tiny house and ride your bike to work. This option isn't fun.
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 finance word for intense growth and it is your best friend as a saver.
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
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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 and how we help our clients save, please book a call!
