Word to the Wise on Saving

If you read my last post, you know Sophie and I sat down and started outlining every dollar she'd earn, every dollar she'd spend, and every dollar she'd save. Thinking back on it, we did it a little backwards. After all, the rule of thumb is that you should pay yourself first, where paying yourself means saving. 

Why save? Lots of reasons. Suze Orman, Clark Howard, Dave Ramsey - the "professionals" (at least the ones that I trust) all recommend having between three and six months of savings racked up for emergencies. (Emergencies these days has really meant unemployment.) But even if you're not super-worried about that, the cushion would be useful for a down payment on a car, a house, perhaps a trip to Europe.  The trick is to save for what you want first, buy it later (and never rely on credit card debt to float the in between).  More on cash savings later when we talk about Sophie's car buying decision.

On top of liquid savings (savings you can cash out on demand without penalty), you should also think about retirement savings. Yes, even you twenty somethings! I know, I know. You're in the best years of your life. You want to enjoy them. Sixty is so far away. That BMW is calling your name. Your parents aren't even retired. Why would you want to save now when you have so many years left to save for retirement?

It's actually pretty simple: the math. Although there are plenty of assumptions built into this little excel spreadsheet, and lots of additional considerations, the story is pretty clear. Saving early has its perks. 

Consider this example:

• You start out with a $27,000 annual salary and contribute 10% a year starting at the age of 22. (Assume the salary increases by cost of living ~ about 3.5% a year). When you're 59.5 (the earliest you can take that money out without penalty), you'll have $930,897  (just shy of a million) saved up.
• You start out with the same salary, get the same annual pay increases, but wait ten years (until you're 32) to start kicking in those funds. When you're 59.5, you'll have $496,730 saved up.

And that's despite the fact that your salary would be close to $100,000 right before you retire vs. a third of that today....

Read the numbers one more time:

$941k vs. $497k

Interpret that another way? In this scenario, you're saving almost half of your total retirement in the first ten years, the other half in the remaining thirty years. Wait another ten years (till you're 42),  and you'd only have $244,672 when you retire. And the real kicker? Opt to not save today and you'll find yourself playing catch up later.

Of course, the numbers will play out differently based on different assumptions. Sure, you're ambitious, you'll probably get a few big pay hikes as opposed to only 3.5% cost of living increases. And, no one questions the fact that as your salary increases, you'll theoretically have more cash to save.  Regardless, play with the numbers and the story saves the same: it pays to get in the habit of saving early. So, to roll it all up?

Save for retirement early or forever hold your peace.