Even if you’re just starting out in your career, saving for retirement should be one of your top financial goals in life.  You might find it difficult to rationalize saving for an event that’s a good forty to fifty years out.  You might say to yourself, “No worries.  I’m still young.  I’m still in my 20s.  I have the rest of my life to save for retirement.”  It’s easy to put off saving for something that’s not going to happen until decades down the road.  There are a lot of things that you have to deal with right now, so naturally, retirement is just an afterthought. 

The Power of Compound Interest

In order to highlight the importance of time, we’ll need to understand the difference between simple interest and compound interest.  Simple interest is just principal xrate of interest x time.  It ignores the effect of compounding.  You take your principal, figure out what your rate of interest is, multiply the two, and then multiply that by a specified number of time periods.  Compound interest, on the other hand, does take into account the effect of compounding.  Not only are you deriving a rate of interest from your principal, but you are also deriving interest from your interest.  To better illustrate the difference between the two, let’s look at the following example:

The Numbers Are Staggering

It’s important to pay off all your consumer debt.  It’s important to save for retirement.  It’s important to save for your children’s college education.  It’s important to build up an adequate emergency fund.  But it’s also important to have some fun in the process.  It is imperative to strike that delicate balance between tackling your financial goals and enjoying life’s pleasures.  Sure, bills need to be paid and money needs to be saved or invested, but it does not mean that you can’t enjoy yourself while you’re working towards those financial goals.

The Present
In college and the few years thereafter, I never really thought much about my financial future.  It’s probably safe to assume that not too many people at that stage in their lives put emphasis on the future.  I was more concerned with the way I dressed than the amount of money I had stashed for retirement.  I’ve always valued money, but I just didn’t know what I was to do with it.  I was focusing on the “present” and thought that the future would take care of itself.  I told myself, “I’m young.  I have plenty of time to save for retirement and all that long-term stuff.”  Although I didn’t assume any debt (aside from my student loans), I also didn’t put aside any money.  Essentially, I spent all the money I earned.  I was having a lot of fun, but I had nothing to show for on my balance sheet.

The Future
It wasn’t until several years ago that I started to focus on the future.  I read books and articles on the importance of saving for retirement and other financial goals.  I studied statistics and charts outlining the advantage of investing early.  I became deeply engrossed in personal finance.  In fact, at times it became an obsession.  I had become so focused on my financial future that I was doing so at the expense of the present.  I wasn’t having fun.  I was turning down invitations to events and activities, all because I didn’t want to spend any money.  I managed to save and invest quite a bit, but I was miserable for it.  Personal finance is about allocating your resources efficiently so as to maximize the things and goals most important to you.  I had forgotten this very tenet.  Traveling has always been important to me, but in my quest to better my financial future I had neglected it as well.  

The Past
Why did I completely shift my focus from the present to the future?  Well, it’s because I was thinking about the past.  After my personal finance revelation, I had major regrets in the financial path I was taking.  I thought to myself, “I can’t believe I just wasted all those years.  I could’ve turned those early years into A LOT more money in the future.”  I looked back.  I wanted to make up for those lost years, so I hunkered down and followed a monastic approach.  I had taken it to the other extreme.  When you let your past dictate your present and your future, no good things will come out of it.  The past can be useful.  When utilized properly, it can serve as a great guide for the present and future.  You just can’t dwell on the past and think you can change it.  What’s done is done.  Learn from the past and use it to your advantage.

Moderation is key.  You can’t solely focus on the present and neglect your financial future.  You don’t want to create additional stress for your future self.  You don’t want to resort to eating cat food in retirement.  You have to look out for the well-being of your future self.  At the same time, you can’t be so obsessed with the future that you’re not enjoying life today.  What good is all the money in the world if you’re old and can’t really enjoy it?  I want to travel the world, but I don’t want to have to do it all in my 70s, 80s and 90s.  I want to take advantage of my youth and live life to the fullest extent possible.  In doing so, however, I do understand there are limitations.  I want to have some fun now, but I also want to ensure that I’m taking care of myself and my family in the future.    

You have to budget both for the present and for the future.  You need to be able to include a category for “fun” in your budget.  For us, traveling comprises an enormous chunk of this category.  When you get a bonus, it’s perfectly fine to buy something small for yourself.  After a long week of work, it’s okay to go out for drinks with the co-workers.  There’s nothing wrong with taking out your significant other to a nice dinner every now and then.  You deserve all of the above.  Just don’t do it too much.  Do it in moderation.  Make sure that you’re still tracking your spending and have all of the other financial bases covered.  The wife and I are not perfect by any means.  We still struggle to find that perfect balance.  There’s so much that we want now, but we also want it good for our future selves.  Thus it is important to strike a balance between the present and the future, while allowing the past to be your guide.

We all want to buy stuff.  Everybody has a weak spot when it comes to spending money on stuff. Recently, it has been Blu-rays for me.  I thoroughly enjoy watching movies, so naturally I want to own some of them on Blu-ray.  However, we have to fight the urge to spend on things we don’t really need.  Personal finance is about effectively managing your resources so as to maximize the things you truly need and want.  If you purchase an item and regret doing so a few weeks later, then clearly it is not money well spent.   Here are several strategies to help rein in superfluous spending:

• Patience is a virtue.  Never rush when it comes to shopping.  If you see something you want online or at a store, don’t buy it on the spot.  Take some time to think about the purchase.  Give yourself a week or two, and see if you still want it.  There’s a good chance that you could be over it by then.  Being patient will eliminate impulse purchases.  If you don’t really care for it after some time, then clearly it is not something you wholeheartedly desire.
• Think about the opportunity costs of that purchase.  While you’re deciding whether the item in question is a good buy or not, think about what you could possibly be giving up with this purchase.  I quantify a purchase in terms of financial goals that are important to me.  This new laptop is equivalent to the cost of a jungle adventure in Belize.  We could beef up our emergency fund by another month instead of using that money on a kitchen renovation.  If I stop myself from buying ten Blu-rays, that money can mitigate the cost of the recent emergency we experienced.  Figure out what is important to you and think about the purchase in those terms.
• When you go shopping, map out your route beforehand.  If you must make that purchase, then do just that.  Don’t wander aimlessly and “stumble” upon other stores.  Figure out what you want, get it, and don’t make any additional stops.  You’re just going to invite trouble for yourself if you make those extra stops.
• Pay with cash.  When you buy something with cash, it makes you more cognizant of the item’s worth.  It’s painful to buy something worth $200 and have to take out ten $20 bills to cover the purchase.  It definitely makes you think whether you’re really willing to give up ten $20 bills to buy this thing.  Your money is hard-earned, so figure out whether you want to shell out hours and hours’ worth of work on the purchase.  Paying with credit card is a lot different.  You’re using a piece of plastic and not handing actual currency to the cashier.  You’re not having to count the amount of money to hand over.  It’s easy and it’s automatic.  It’s dangerously easy.
• Take advantage of holiday sales and special deals.  So you’ve thought it over and decided that you really want to buy this stuff.  Well, if you’re going to get it, might as well get a discount on it.  Don’t settle for paying full price.  Just about every store will have sales and special deals throughout the year.  There’s a  Presidents’ Day Sale, Mother’s Day Sale, Father’s Day Sale, 4th of July Sale, After-Christmas Sale, to name a few.  The $10, $15 or $20 you save on something might not seem like much, but it translates to additional money that can be applied to some of your financial goals.
• Use coupons.  To piggyback on the last tip, you can also use coupons when purchasing an item.  If there is something I really want, I surf the web and search for a coupon.  Websites such as slickdeals.net and couponcabin.com are among my favorites.  Additionally, signing up for a store’s mailing list sometimes has its perks.  The other day, I wanted to buy something at Old Navy.  I signed up for their mailing list and received an email for a “Take $10 off $50” coupon shortly thereafter.  Be careful though.  Coupons can be a double-edged sword.  Just because you have a coupon does not substantiate a particular purchase.  Figure out first if it is something you really want, and if so, then apply the coupon towards the purchase.
• Do some comparison shopping.  Another strategy I typically follow is to shop around.  With the advent of the Internet, comparison shopping has never been easier.  With a few clicks of the mouse, you can obtain the price of an item from a cornucopia of different vendors.  However, if you are making the purchase online, make sure that the vendor is reputable.  The lowest price online is not necessarily the best deal for you.
• Buy out of season.  If you’re buying clothes, wait until the clothes is out of season.  You’re sure to get it for cheaper than if you would’ve bought it a few months earlier.  The same logic applies to technological goods, which are constantly being upgraded and enhanced.  A new, top-of-the-line camera that was selling for $500 two or three years ago might not even be worth half that today.  You don’t always need to have the best and newest items today.

Following these strategies on your next purchase is a great idea, but you also have to develop a long-term approach.  If you continue to apply these tips, then they will eventually be ingrained into your head.  Make it a habit to be conscious about your spending.  You can undoubtedly free up some extra money which can go towards more important things in your life.

No, this is not some get-rich-quick scheme.  There is in fact an investment that will provide a quick 100% return on your money.  Before I get to that, I do firmly believe that establishing a “starter” emergency fund and paying off debt is of paramount significance.  For those of us mired in debt, these are certainly two major steps in the transformation to become debt-free.  I would put these steps ahead of paying extra principal towards the mortgage.  Ahead of the children’s college funds.  Ahead of individual retirement accounts.  I would put them in front of most other financial goals, since eliminating high-interest consumer debt is a springboard to achieving financial success.

However, assuming you’re not in the midst of losing your house or some other catastrophe, there is one thing I wouldn’t put them ahead of.  Notice above I wrote “individual retirement accounts.”  That’s right.  If you are an employee and your company offers a 401(k) match, then I would put the 401(k) contributions ahead of the “starter” emergency fund and paying down the debt.  Just make sure you contribute enough to take advantage of all the free money offered by your employer.  This is free money.  You don’t want to turn down free money.  You’re not going to get this kind of guaranteed return anywhere else.  Even if your credit card interest is 30%, it is by far still more financially advantageous to get the 401(k) match.

How does it work?  Let’s say that your company offers a 100% match of up to 3% of your salary.  For a woman with an annual salary of $50,000, she should contribute $1,500 (3% of $50,000) to get the full match.  Assuming her salary stays constant, she will receive an extra $1,500 at no cost each year.  Let’s say that the company instead offers a 50% match of up to 6% of your salary.  It’s not 100%, but mathematically, the results are equivalent to the previous example.  The woman would contribute $3,000 (6% of $50,000) to take complete advantage of the match.  50% of $3,000 is $1,500, which is the same amount as before.  Even if your company offers only a 50% match of up to 3% of your salary, it’s still a great deal.  50% is still higher than the interest rates on your credit cards (let’s hope so!).  Unless you took on a payday loan with a ridiculous interest rate, 50% is going to be higher than just about anything else. 

You definitely don’t want to pass up a 401(k) match.  Where else can you get this kind of return without taking on any risk whatsoever?  Never mind the historical annual returns of the stock market.  As long as you take advantage of the employer match, you’ve just locked in a 100% return for yourself.  Give yourself a pat on the back.  That was super easy.