By in Investing, Mind and Money, Retirement, Saving

How to Turn $500 into $5,000

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Have you ever read an article and wished you’d written it?  “The Mighty 10 Rule”, guest post by  Matt Alden of Dividend Monk, at Budgets are Sexy, is that article. This article lays out the reason to save.

saving tips

Spend Smart-Save Smart-Live Well

Why is Saving for the Future so Hard?

Even though we all know we should save for the future, why is it so hard? Because when you want something, you don’t want to wait.

Why is saving so hard?

  • You want it now; live for today, because tomorrow you might die. You prefer not to wait.
  • Psychological aspects deter you from saving.
  • Spending can make you happy (at least in the short term). It’s fun to buy new shiny things.
  • Saving can feel like deprivation. Initially, when you save, you don’t get anything. In fact, you lose the opportunity to spend.
  • Poor modeling teaches spending. If your mom or dad modeled a spending lifestyle, you likely picked up that habit. When mom and dad splurged at the mall, you learned that splurging at the mall is a good idea.

Switch Your Thinking About Saving

What if I told you that you didn’t need to budget and that here’s a mental trick to help you save.

Imagine, before you buy, paying ten times the amount of the purchase price for that same item. Considering a splurge on the new iPad tablet for $599? Would you pay $5,990 for the same tablet? Probably not. But clearly, the tablet doesn’t cost $5,990….. but that’s how much future income you forgo by buying the tablet today, ten times the original price.

The math is quite simple. Assume that instead of buying the iPad for $599, you invested the funds in a diversified index mutual fund and averaged an annual rate of return of 6%. After forty years, your initial $599 has grown to about $6,000. Choose to invest instead of spend and you have the opportunity for greater wealth in the future.

As Matt mentioned in the “10 Rule”, if you apply this concept to everything you run the risk of cutting spending back to miserly levels. Obviously, this is not the best use of the rule. You need to spend to live and enjoy life. Yet, realize that every time you spend, you are forgoing the opportunity to save and realize greater wealth in the future.

Balance is the Answer to How Much to Save Now

Spend today on what matters. It’s up to you to decide what’s important now, and what’s not. If you want a tablet computer, do you need the iPad? Why not buy the Samsung Galaxy for $179, instead of the iPad for $599. Invest the $420 (in a diversified index fund) you saved by not purchasing the iPad and in 40 years, you have $4,320 more in your account to spend than if you’d bought the iPad.

Think about whether a purchase now is worth giving up future wealth, worth ten times the cost of the item.

How do you motivate yourself to save? Do you have your savings automatically deducted from your paycheck?

image credit; google images_inhabitots