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The Best Financial Philosophy You Can Have

7 September 2010 6 Comments

If you’re a young reader, you have serious advantages.  The biggest advantage is that you can participate and embrace the best financial philosophy that exists.  So, what is it?

The best financial philosophy is to put away as much money as you can by say, 40 years old and watch it grow into a massive chunk of money.

Why 40?  Well, 40 still allows you plenty of time to grow until you might need it for say retirement.  Most retire around 65 so that is still 25 years of serious growth.

It is insane how powerful compounding interest is.

The good news is that you can amass a good sum of money by 40 years old with some diligent savings and personal finance habits while you’re young.  Your money will grow each year, even that $500 you saved when you were 24 years old.

The problem is that most of you aren’t saving anything.  You’re stuck with a mound of debt and you’re paying interest on that instead of putting money away into your savings and investments.  You have to eliminate these massive distractions from your life.  You have to eliminate debt.

You can’t embrace this financial philosophy until you banish debt from your life.

Once you banish debt, you implement sound habits and a sound structure in your life to maximize the income you’re receiving.  This means not dropping four grand on a European vacation when you’re 26.  You need to sock that four grand towards your savings.  Frugality isn’t sexy these days, but having lots of money is so make sure you are frugal.  It sure will pay off down the road.

Just a simple example of the power of saving when you’re young… let’s say you implement a wartime lifestyle and sock away $1,000 every month during the time when you are 25 to 35 years of age (10 years).  Assuming a 6.5% return (fairly conservative), that money would be just over $300k when you’re 35.  If you stop saving completely that money will still grow to over $1.5 million by the time you’re 60 (25 years later).

Save early and often!

6 Comments »

  • Carol@inthetrenches said:

    Excellent post. In the early years we get so busy doing so many things: get married, buy a home, raise a family, develop a career. It's so easy to leave savings out of the scenario. It would be interesting to see the effect of a two income family one providing the day to day expense and the other saving their paycheck.

  • Evan said:

    Making saving a significant portion of your income while you are in your 20's and 30's is the best financial philosophy. One I hope will pay off for me!

  • hugh said:

    agreed, frugality.. not so sexy. that puts me at 'beastly disgusting' on the barometer.

    so ive got the idea of saving down – socking away as much as i can each month… what now? how do i get to that "conservative" 6.5% rate of return? please advise this unwise 25 year old?

  • Shena said:

    This is a great post and a philosophy I truly believe in. However, what do you do if you're one of those people who has a substantial amount of (school loan) debt and your goal is to pay all of that off so you can invest more? Unfortunately, my rates are 6.8%+ as I had to pay for my education by myself. Thus, it seems counterintuitive to start investing now if I won't be able to find a resource that will give me an interest rate higher than the debt I have now.

  • Geoff said:

    A few comments: a) that "conservative" 6.5% return is bunk. That is very high. Most portfolios will yield 2-4% annually in a low-interest-rate environment. And b) your calculations are incorrect. The scenario you've presented would actually result in $167,579.61, not "just under $300,000" (http://www.mycalculators.com/ca/savecalcm.html)

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