Why aren't people saving?
Some people think they can't save because they need all of their income to pay the rent or mortgage, buy food and cover other necessities. While that is true for some, most of us could set aside a little bit each month.
When you're living paycheck to paycheck, you might assume that whatever small amount you may be able to save wouldn't be enough to make a difference and therefore wouldn't be worth the trouble. It is easier to ignore the problem, run up some credit card debt to buy things you want right now and hope things will somehow work out someday.
In case you haven't heard, “hope” is not a good strategy.
Developing a regular habit of saving and investing — even a little bit of money — regularly over a long period of time really can make big a difference in your financial life.
Heck, we've even reviewed a number of apps that help with this, such as Acorns and Digit. We especially like Digit because it's really easy to save. All you need to do is link your bank account and Digit takes care of the rest. You likely won't even notice the spare change Digit automatically saves for you, making it a true set and forget it approach to building wealth.
But you don't need an app to see why saving even a small amount every month is a better idea than spending everything you've got or — gulp — using your credit card to buy more than you can afford. Even if you really want that pair of shoes or feel like you deserve a night out on the town.
Spend it or save it — what would you do?
OK, let's imagine two friends in their mid-20s, Sarah Saver and Sam Spender. Both earn the same income and pay the same amount for their rent, utilities, cellphones, and transportation.
One day, a mysterious stranger approaches them and says, “I'm going to give each of you $100 every month for the next five years. You can do whatever you want with the money. At the end of Year 5, we'll have a little chat.” As you may imagine, they both accept the offer.
Sarah invests her monthly $100 payments across a few ETFs (exchange-traded funds), some that hold stocks and some that hold bonds. She earns a 5% annual return on the money.
Sam decides to spend his $100 each month on various things he enjoys. In fact, he concludes that since $100 per month is just $3.33 a day (on average), there's no real harm in spending an additional $100 per month, using his credit card. After all, what's the harm in borrowing a measly $3.33 per day?
Five years pass. The mysterious stranger reappears and asks Sarah and Sam to describe how they used the money given to them, a total of $6,000 each. Sarah reports that she now has over $6,800 in her investment account. Sam admits he spent it all and more; he has paid over $1,100 in interest charges and now owes almost $2,300 on his credit card. He has no savings.
Be your own mysterious stranger
What is the point of this story when it is highly unlikely that a stranger will give you $100 every month for the next five years?
Well, I'll bet you can come up with your own $100 every month, by yourself. You can be your own mysterious stranger.
Remember, it's just $3.33 per day. That's easy. Instead of ordering a soda or iced tea with lunch or dinner, drink water. Skip the fancy mocha/latte on the way to work. Go pick up your take-out dinner instead of having it delivered. (Avoid the delivery charge!) Make it a contest to see how you can cut back on your regular expenses by just $3.33 a day.
Now, take that $100 you save every month and sign up for our recommended microsavings app, Acorns. You can get started for just $1 a month.
With Acorns, you can set the app up so that you automatically invest $100 from your banking account every month. But that's not all — you can also use a program called Round-Ups. This will round up the change from every purchase you make with a connected debit card and invest that amount too. So if you buy yourself a $1.19 coffee from McDonald's, Acorns will round it up to $2 and invest those extra 81 cents.
Your funds are invested into diverse index funds, so there's no risk of losing it all on one stock.
You can see how this “micro-investing” starts to add up quickly.
You can check out more ways to save with Acorns here. And you can get a retirement account and checking account for only $3 a month. That will boost your long-term savings potential.
Plus with their Smart Deposit feature, you can set aside a portion of your paycheck into your checking, investing or retirement account.
Thanks to the power of compound interest, if you invest just $100 every month from your mid-20s until retirement at age 65, you can end up with $83,500… and possibly more. You don't need a mysterious stranger to get onto the path to saving. If you want it, you have the power to turn $100 per month — $3.33 per day — into real money over time.
So let's not only quit the “Non-savers Club” but tear up the membership card into a million pieces.