Save Money, Live Better

The Magic of Compound Interest


I’ve never considered myself super disciplined with money; I’m definitely not some personal finance guru. 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. However, once I understood the magic of compound interest, it was easy to make, “Save money, live better,” my new anti-spending mantra.

And that’s how, despite occasional impulse buys, I’ve managed to maintain this over the past year:

 

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

The Ultimate Savings Goal: Financial Freedom

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 goals and 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 monthly bills and expenses, created a budget, and committed to a savings plan. By putting aside a (large) amount of money each month and investing it, we’ve put ourselves on the fast track toward affording the Big Expenses in life. And—hopefully—early retirement.

The Key to “Save Money, Live Better?” Starting Early

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 go to the grocery store and 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:

Save money, live better with the help of compound interest

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 investing $10 of extra money a month, starting at age 25, will net you $19,685 by the time you’re 65 (with a 6% interest rate.) That’s a lot of money for such a small investment! 

Committing to a “save money, live better” mindset doesn’t have the quick dopamine release that an impulsive bout of overspending at Amazon might, but resisting the temptation of temporary joy can lead to a future of financial stability. 

Re-evaluate your spending—shop around for cheaper car insurance, cancel that gym membership that you don’t use, DIY some home repairs, unsubscribe from streaming services you don’t use, get creative about cutting down your grocery bill—and automate deposits into a retirement account that will put the magic of compound interest to work for you instead!

Save more now to live better later. It’s worth it!  

Ready to start a budget so you can save more? Try YNAB for free for 34 days!