Small Savings Now = Big Payoffs Later
Kirsten is 25, recently graduated from college, recently married, and ready to embark on a working career that will span 40 or so years. She also has this habit of drinking a certain brand of pop (name withheld to protect the innocent) that costs her $1 a day. “Gotta have my ‘so-and-so’ fix,” she said cheerfully. Knowing that time is on her side, I suggested the following.
“Kirsten, if you could give up that pop fix of yours and instead save that $1 for retirement, would you be interested?” And her reply was “nope.” So I said, “Let’s sweeten the terms. What if that $1 a day can become over $134,000 by the time you’re 70. Deal or no deal?”
That dollar figure grabbed her attention. With her BBA in management background, she knew enough about how money works to realize time is a tremendous asset for a young person just starting out in a career. She also wanted to know what assumptions I had made to reach that $134,000 figure.
I assumed she invested $30 per month (the equivalent of sacrificing her beloved pop on a daily basis) for 45 years (age 25 to 70) and earned an average annual return of 7.5%. To get a 7.5% return, she’d need to invest in some type of stock mutual fund. Will the stock market return 7.5% for the next 45 years?
I don’t know; I wouldn’t dare go out on a limb and make that kind of precise prediction about an unknowable future. But is 7.5% realistic to expect? Or 6% to 9%? I’d say so. Last century stocks returned 10-11%, depending on the exact timeframe you chose. Let’s not quibble about what future returns will be; everyone is entitled to their own opinion.
For Kirsten though, the key point she realized is that by making a small sacrifice now, she can anticipate a big payoff in the future. She is developing the saving habit (which is better than her pop habit). As her career progresses and her income grows, maybe she can start saving $2 a day. That could become $268,000 by the time she hits 70. Or maybe her husband could save $1 per day also. You get the idea.
So Kirsten is off to a good start for her financial future. On a side note, her dentist appreciates my financial advice as well, since her tooth decay will drop dramatically. Another win-win. The pop manufacturer, however, has written me off its Christmas list, so I guess you really can’t win them all.