It's Not How Much You Make, But How Much You Keep17 Mar 2017
I can’t claim the words of wisdom in the title as my own. They come from the financial commentator, businessman, author and investor, Robert Kiyosaki, whose worth is valued at $80m, a fact which probably makes him worth listening to when it comes to financial advice. The full quote is actually ‘It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.’ While the words are not mine I wholeheartedly agree with them.
Let me take you on a journey to meet your future self. You’re 60 or 65 years old and on the cusp of retirement. You’re looking back on a successful career, a tidy final salary and a working life during which you have bought and done pretty much what you want when you want. That’s all well and good but will you also be congratulating yourself on the size of the pension pot you have been able to accumulate with your generous earnings over the course of your career, or will you be wondering just how to sustain that lifestyle for the next few decades because you have spent all you earned?
Because living luxuriously and acquiring everything your heart desires is all well and good but it doesn’t guarantee your future financial security. To do that you need to live on less than you make and commit to investing the rest.
This is a message that is difficult to get across to the young. The benefits of saving are hard to see when you are fit and healthy and retirement is decades away but it is precisely the young who can benefit the most from the magic that is compounding. Compounding is a highly dependable way to make your savings work for you. Here’s a very simple example to show how.
You get a bonus of $15,000 and decide to invest it in a savings plan. It earns an average 5% annual return. At the end of year one your $15,000 has earned interest of $750. You reinvest this so that by the end of year two, with interest remaining at 5%, you have not only earned $750 on the initial investment but an additional $37.50 on the interest from year one. That’s essentially free money. While this figure is not in itself life-changing, over a forty year period your $15,000 will grow to just shy of $106,000. Now that is impressive – you’ve made $91,000 with no effort on your part, bar resisting the temptation to spend your accumulating pot of cash!
Of course your pot will grow far more if each month you accumulate additional savings. Even a relatively modest addition of $200 each month will bump your pot to over $400,000 after 40 years. And that is exactly why Albert Einstein called compounding the eighth wonder of the world and why starting to save early is a no brainer.
Many clients claim that they can’t afford to save but you don’t need to start big and there are always small ways that you can cut back on spending in order to be able to save even a little. Cut the gym membership and do exercise that doesn’t cost you anything, have friends for dinner once a month instead of going out, take a packed lunch to work instead of shelling out for a Starbucks sandwich and coffee every day, limit alcohol to the weekends. It’s all about getting into habits which become second nature. Start saving a little each month and build up the amount as your salary increases. Once you start to see your pot accumulating and the benefits of the sacrifices you are making, you will want to save more.
And you can be sure that your future about-to-retire self will thank you for the lovely comfortable retirement that they have to look forward to, not to mention the gratitude from your future generations that Robert Kiyosaki talks about!