Why You Need to Save

We live in the richest country in the world, but many Americans are just living "month to month." They have trouble paying their rent or mortgage, their car lease payments and their credit card bills. Others may have a nagging feeling that they should be saving more money.


In our crazy, consumer-driven society, why are some people able to hang onto their money? In the last few years, Americans have collectively spent more than they earned after taxes. This means that their out-go is greater than their in-come. If they try to solve this problem only by focusing on earning more money—and do not control where they spend it—they will find themselves "running in circles."

Saving money is even better than making money—and a lot easier. That is because you do not have to go out and earn it—you just keep it!

They say that the quickest way to double your money is to fold it in half and put it back in your pocket. But seriously, saving increases your money!

Slow and steady saving wins the race. The turtle will outrun the hare if the turtle perseveres. Small savings over time are more likely to create wealth than taking big risks. Use the magic of compounding interest to help you. If you keep time on your side, you can create substantial wealth.

Here is an example: If you start by saving just 1% of your income and you bring home (net) $2,000 per month, you would save $20 per month. Doesn't sound like a lot, right? Here is the good news: If you saved $20 per month for 20 years at an annual rate of 10%, you will have saved about $14,000. At the end of 40 years, you would have saved about $112,000!

Many people don't think about it when they buy something small but overpriced, like a $5 cappuccino. Take a close look at the small treats you buy for yourself. If you gave up just one $5 treat each week, you would have your $20 per month to invest and $14,000 more to invest probably well before you are ready to retire.

Small amounts grow to large ones over time if properly invested. It is not too late to start saving. Of course, the earlier you start the better, as it is much easier to save when you are young and do not have as many commitments and obligations. No matter where you are in life, you can start now to save and reach your savings goals.

If your income is $1,000 a month and you need only $900 per month, you will be happy that you have $100 left over to invest or spend as you wish. You have avoided debt and managed your income responsibly. On the other hand, if your income is $1,000 and you need $1,100 per month, you will be unhappy because you don't have anything left over. You will continue to fall more and more behind. As Charles Dickens wrote in David Copperfield more than one hundred fifty years ago, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

In other words, if you spend less than you receive, you are more likely to be happy. However, if you spend more than you have, you will be unhappy, because overspending puts you into debt. As someone once said, "If your outgo exceeds your income, then your upkeep will be your downfall." So learn to be thrifty.

Perhaps your parents or teachers told you to "save for a rainy day" and "pinch your pennies." That's being thrifty! To be thrifty is to be economical, spend wisely and save your money.

Thriftiness is not just for average people. Some billionaires are thrifty. For example, Jim Walton, of Wal-Mart, worth $18 billion, drives a 1999 Chevy pickup. Warren Buffett, worth $57 billion, lives in the same house he bought for $31,500 almost fifty years ago.

Some people spend much of their free time thinking about shopping and how to spend money. Sometimes they think they are "saving" when they shop. Unfortunately, most of the time they are just spending.

Other people devote their spare time improving lives, instead of spending money. They visualize how good their life will be when they are finally financially independent. They have learned the game of not spending their money—and enjoy it. They learned to be the winner of the savings game, and you can, too!

Heidi Clingen is a long-time resident of Stevenson Ranch. She and Samuel K. Freshman are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them at Heidi@TheSmartestWay.com.