When you earn enough money to pay for everything you need there’s no reason to save regularly, right? Wrong. There’s far more to becoming wealthy than earning a high income as suggested in the well-known proverb ‘The art is not in making money, but in keeping it’.
High income earners can make the worst savers
It’s an unfortunate fact of life nowadays that the more you earn, the more you tend to spend. Today, there is so much pressure to spend money on the latest gadgets, prestigious fashion labels and having a picture postcard home. We’re living in a spending culture where the next best thing is always just around the corner.
When you earn a higher than average income it’s easy to justify upgrading your lifestyle here and treating yourself a little bit there. After all, you’ve worked hard to earn that income and you want to get some enjoyment out of it.
And even if you don’t think of yourself as the type of person who is careless with their money, there may be other factors at work. Behavioural scientists have shown that it’s human nature to seek instant gratification. We’re much more likely to do something that makes us feel good now, like spoiling our loved ones with lavish gifts, than doing something that’s better for us in the long term, like saving some of our money.
You reap what you sow
You may be able afford a high standard of living now but could this lifestyle be maintained if you stopped working?
To get the full benefit of your income you need to cap your spending and get into the habit of putting away part of what you earn every week or month. This way your money can start working for you.
There are many benefits of having spare cash around:
You will have money set aside for any small emergencies so you don’t have to worry about how you will cope if something goes wrong
You will be able buy things with cash rather than credit cards. Many retailers offer discounts for paying with cash. And you’ll be saving money because you won’t be paying interest on credit card purchases.
Importantly you will have spare money for investing which will help you grow and protect your wealth over the long term.
The more you save, the more you will earn
Regular investing also gives you the chance to boost your savings by taking advantage of compound interest. Compounding, or earning interest on your interest can make a significant difference to the value of your savings or investments over time. The longer you save, the greater the effect of compounding.
Let’s look at a simple example that shows the power of compound interest. Say you had savings of $20,000 and each month you put away $500. In just 10 years that $20,000 would have grown to $110,074, assuming the interest rate on your bank account was 5%. Of that, $30,074 would be the compound interest that you’ve earned along the way.
Spend wisely and enjoy the benefits of saving
Starting a savings plan is one of the simplest and easiest ways to save money. Your savings are kept in a separate account to your everyday spending account, so you won’t be able to spend this money as part of your weekly expenses. It will also attract a higher rate of interest, which if left to accrue in the account, will help you get your goal of wealth creation underway.
Article prepared by Infocus Wealth Management