You can find Part 1 here: My Second Million – Part One
When should you start saving? NOW! It is never a bad time to start. If you already started, then great, if not, why not start now. Of course, the younger you are, the greater impact your savings will have since time allows for the magic of compounding interest.
The first priority is to save $1000 as a starter emergency fund. Then accelerate your debt payments (except for your mortgage, which comes later). You can use some of your savings to continue to build your emergency fund to a level that is equal to three months expenses or more. Then concentrate on retirement savings and mortgage reduction. If your employer offers a 401k with a match, then fund your 401k enough to get the full match. That is free money – take it.
Spending Tomorrow’s Money Today
I am going to use myself as an example. I am very nearly 50 years old. That is five decades on the planet, five decades of experience and still learning each day. According to the latest Social Security retirement tables, I will be eligible for full benefits at age 67, just 17 years from now. Normally that would seem like a long time, but since the last 50 years flew by, I suspect that my retirement date will soon be upon me.
TVM (Time Value of Money) says that for every dollar that I invest today at an assumed earnings rate of 8.5% per year, that dollar would grow to be $4. My savings factor is four. Therefore, if I buy that burger meal for $6 then I have forfeited $24 of my future savings. Now, I am not saying that you should never buy a burger meal. However, if I really love burgers and bought that meal five days per week for a year (250x$6), I would be spending $6000 of my future dollars. Those burgers just aren’t that good and certainly not good for me!
We each can find ways to save money, whether it is to save for our future or pay off debt. The younger you are, and its never too late, the greater your savings factor is going to be. If you are 25 and retire at 67, your savings factor is 30.76 @ 8.5%. Now there is an expensive burger meal. Time allows the magic of compounding interest to grow your dollars.
Keep in mind that as your money grows so does the cost of living. If we assume an average inflation rate of 3%, the cost of living would double every 24 years. That means our 25 year old would have to spend $3.46 for every dollar spent today. Therefore, you can see where savings is vitally important.
My favorite investment site for people just starting out is http://www.sharebuilder.com/ because it demands no minimum deposits; allows you to automate your investments; and allows you to buy incremental shares. It is one among many great sites.
Take care, stay well, and be safe.