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18 Apr 2017

How Millennials Can Capitalize On The Magic That Is Compound Interest

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by Lauren

I’ve never considered myself super disciplined with money. I really struggle to squash the squeal of “I need that!” whenever I see a cool new video game or a just-released book by my favorite author. And the worst? Cupcakes. My heart (stomach?) just cannot say no to cupcakes.

And yet, despite the occasional impulse purchase, over the past year I’ve managed to maintain this:

(Showing only Jan-April due to a Fresh Start in Dec.)

 

Yeah, that’s right. The mythical 50% savings rate.

A Nest Egg Before The Nest

My husband (thank goodness!) is great with money, and even better, at keeping me on track. I attribute 90% of my financial discipline to him (and the other 10%, of course, to YNAB). We knew early on that we wanted to be intentional about our financial decisions, and maybe even do crazy things like buying cars with cash, paying off a house in five years, and eventually becoming financially independent.

So we hunkered down and took inventory of our expenses, created a budget, and committed to a savings plan. By putting aside a (large) chunk of our income each month and investing it, we’ve put ourselves on the fast track toward affording the Big Expenses in life. And—hopefully—early retirement.

20-Somethings Are In A Unique Position

We can save so much because our expenses are low, in no small part due to the fact that we don’t have kids and we live in an affordable state. Our apartment is economical, we have never bought new furnishings or decor (well, except one much-needed couch and one armadillo-shaped lamp from Target which may or may not have been one of my impulse purchases and is much cuter-looking than it sounds). We make the majority of our food at home, and we take care to stick to our YNAB budget.

New clothes? Rare. Phone upgrades? Only after the old one has become a fancy-looking brick. We’re still using the same starter cooking pot set I had from college, in all its chipped, scratched, teflon-flaked glory (okay, we probably need to replace those).

Younger people like us are in such a cool, unique position. Really. We’re (relatively) fresh from college, our careers are (finally!) starting to take off, and we’re getting an influx of money while expenses are still low. And while the natural tendency is to start purchasing upgrades and fall into the chokehold of lifestyle creep, we have the opportunity to take a step back and put a huge portion of our energy (and money) toward the future instead.

It might not always be Pinterest-pretty. Or Instagram-worthy. Not yet, at least. But by foregoing certain things now and being mindful about saving for future goals, we are in a position to make our future whatever we want it to be.

Compound Interest Is Your Magical Best Friend

There’s another reason why focusing on your saving habits early is a good idea. And that’s compound interest.

If there was anything in this world you could call magic, compound interest would be it. Oh, you mean my money will multiply as it sits there waiting for me to use it? Yes, please!

Here’s a great illustration from Business Insider of how starting early can make such a huge difference—consider two hypothetical savers:

Emily (blue line) puts $200 into a retirement account each month. Dave (red line) does the same. They both have an estimated return rate of 6% and continue $200 monthly contributions until they retire.

But—and this is the key—Emily begins saving ten years earlier. And so, by the time Emily and Dave retire, Emily ends up with almost twice as much in saving as Dave.

So, yeah—that. By starting when she was 25 instead of 35, Emily was able to double Dave’s savings rate, even though she only contributed 33% more to her account. That’s the magic.

Save Smart, Spend Smart

Even if your savings strategy isn’t as aggressive as ours—we all have different situations and priorities!—just being aware of your spending and making sure you’re saving for things that really matter to you (not armadillo lamps or maybe, armadillo lamps…) can go a long ways toward improving your financial future.

And if you’re able to save more (is that cable subscription really better than Netflix?), then why not try it? Even $10 a month, starting at age 25, will net you $19,685 by the time you’re 65.* Besides, don’t you know the second season of Stranger Things comes out later this year?

*(with a 6% interest rate)

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