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Last week we posted “Don’t Make These Financial Mistakes on the Path to FIRE!“, our longest Two Sides of FI video to date. We had so much to say on the topic that even with splitting our edited footage into two parts (part 2 is now live as well!), it was still long. Why? It’s simple: none of us come into this world as personal finance wizards. We stumble through life making financial mistakes in assorted ways. Most of us make lots of them! That definitely turned out to be the case for us, and we enjoyed discussing our many misses along the way. I encourage you to check out the video!
The episode originally had much less of a clickbait-style title. But when we saw the early traffic wasn’t at our usual level, we amped up our marketing! As I suspect we all know well, humans are rather emotional creatures. Many people worry a lot about money, often for very good reasons. But even the more fortunate among us are no less emotional about cash. So our sensationalist headline did result in an uptick in views! Thinking about our conversation in this episode prompted me to write about a common issue that we discussed: wishing we’d saved more, earlier. Read on and avoid our mistakes…
Most of us get a slow start when it comes to saving and investing
Few of us had the knowledge and/or initiative to become big savers growing up – even if we had jobs throughout our teens, as Eric and I both did. As soon as we start earning money, we generally spend it. Sure, plenty of us start savings accounts – we did too. But humans aren’t born with a desire to save and invest. Generally, someone has to introduce us to the concept and convince us of its merit. Unless you’re from a wealthy family, that often doesn’t occur until your first “real job” after high school or college – and only if you’re fortunate enough to work somewhere with a retirement savings plan like a 401(k) or a 403(b).
Even if we do take advantage of those workplace plans, many of us fail to realize the merits of participating fully. How many among us have contributed to a retirement savings plan but didn’t save enough to achieve the full employer match? That’s equivalent to saying “no thanks!” to free money. Yes, I know it can be hard in those early years. As I whined about often early in my career, I was the lowest paid of all my college friends in my first job out of school. It can feel like a real struggle to meet all your obligations and save enough. But even if not right out of the gate, as soon as you can, it’s important to kick up the savings. It will yield huge leverage over time as I’ll share below. Not doing that soon enough is a common financial mistake – one often not realized for many years. A sobering fact: according to Vanguard, in 2020 the median 401(k) balance at age 65 was only $65K. That means half have saved less than that.
The best time to start is yesterday and the second best time is today
So you got a slow start – or haven’t invested at all. Is it too late now? As some will know, one of my favorite podcasts is The Money Guy Show. I’ve been listening to it (now I watch on YouTube) for 8 or 9 years. The title of this section is something I’ve heard hosts Bo and Brian say many times over the years. Sure, it’s best to start saving early (and often), but is it ever too late? Technically, no – but playing catch up becomes harder and harder over time. One of my favorites of the great free resources they have on their website is the Wealth Multiplier. It describes how much money you need to save and invest monthly to reach $1M by age 65. How big of a difference can a few years of savings make? Check out this snippet from their chart:
My favorite take-home from this picture is one they point out often: you have an 88X multiplier on your savings when you start at age 20. In other words, every dollar you invest at 20 can yield $88 by age 65. By comparison, at age 25 that multiplier is down to 44X, at 35 it is less than 13X, and just over 7X by age 40. Download the full table and you’ll see that it only gets worse from there. Translating that into monthly savings, you’ll agree there’s a huge difference between saving $95 vs. $780 each month comparing ages 20 and 40. Wow, right? Particularly for those who don’t love math, I think this image best shows the power of compound interest over time as compared to a graph.
Putting it in context
Eric and I both saved early on and took part in 401(k) plans and other savings vehicles over time. But neither of us would say we took full advantage of those plans in our earliest work years when the multiplier was huge. As we discussed, we did have some financial missteps, challenges, and setbacks along the way – I got divorced, we had student loans, my expenses went up due to relocation, we started families, etc. But even so, in hindsight we know we could have saved more, sooner. We didn’t prioritize saving as early as we could have. Neither of us fully investigated the investment options available to us in those early years. We are both fortunate to have gotten much smarter about things eventually, and benefitted from our career successes which enabled financial catch up. But things could have gone very differently if we hadn’t.
I won’t go into all the details here, but there are many other aspects to consider on this topic, some of which we touched upon in the episode. There are a variety of different tools available for investing depending on the country in which you live; each of which has their tax benefits and other aspects to consider. In the US, these include Roth IRAs and Health Savings Accounts (HSA), just to name two. Particularly if you are early in your career or maybe even still in college, I encourage you to investigate these options. Roth IRAs in particular are a very powerful tool and are available to you as soon as you have earned income. Wisely, Eric has already gotten his working age kids into Roth plans!
But isn’t it difficult? I don’t know where to start!
Above all, don’t panic! This does not have to be complicated! If you have a workplace savings plan and are wondering how to get started, look into target-date mutual funds. These are simple and effective plans that run on autopilot. They have very low fees and auto-balance your portfolio between stocks and bonds relative to your age and time to retirement. And if a plan isn’t offered through work? Have a look at some of the Books listed on our Two Sides of FI website. In particular, I’d recommend The Simple Path to Wealth by JL Collins. This fast and easily digestible read is chock-full of investment guidance that you will understand immediately and can readily apply. It’s very popular for a good reason.
Now get out there and save! I wish you all the best in your financial journeys!