Benjamin Franklin once said, “A penny saved is a penny earned!” When I first heard this advice, I thought, “yeah, yeah, yeah, whatever grandpa! That doesn’t even make any sense! If I earned it in the first place, how does saving it make me earn it again? It’s the same penny!” I had already learned that adults sometimes say the weirdest things to keep kids from buying candy and toys. Still, it seemed to make them so happy to see me sock away some of my birthday present money and allowance, so that’s what I did. Every so often, I would want a toy or cool new shoes or game so I’d ask mom for some of my saved money so I could buy it. She would warn me that if I spent the money now, I wouldn’t have it later. Sometimes, that would make me pause for a moment to consider it, but usually I just went and spent it anyway.
Just like so many stories you’ve heard like this, I did cherish the object more and take better care of it, cautious about which friends I would let play with it. I had bought it with my hard-earned and saved money, and there was a limited supply where that came from. I was never very materialistic. Sure, I wanted the new Star Wars action figure, but if I couldn’t have it we would just play with the other action figures. “Okay, for now, Frozen Tundra Luke is going to be Boba Fett since we have regular Luke too.” Still, saving money wasn’t a goal for me. It was just something I did to make the adults happy, and I was more than willing to spend it if an opportunity arose. It was just “put the money away for now, and you’ll have the same amount later when you want something.”
As I got older, I learned about earning interest, and the fact that if I didn’t spend it now, I would have a little bit more later. Sure, I could buy ten pieces of Bazooka Joe bubble gum with that dollar right now, but if I put it in a savings account, I could have eleven pieces this time next year! That was power. That put a value on having some patience, in that I would be rewarded with an additional piece of gum in a year. To be honest, a year is a very long time when you’re eight or nine years old, so I never got to that eleventh piece of gum if I had a choice. Luckily for my spending habits and sweet tooth, my parents didn’t give me the option and I soon forgot about that dollar. Were my parents effective at making me save money? Yes. Were they effective at teaching me to make that choice for myself? Not as effective as they would have liked. I hadn’t learned about compound interest, or about investing, or the power that they held. I hadn’t learned about those things yet.
Then one day, I learned about the 4% rule. It basically says that if you invest your money in a collection of index funds, bonds, real estate, and other investments, you can withdraw 4% every year for the rest of your life and you won’t run out of money. It’s more complicated than this simple explanation, and thousands of people have explained it in greater depth. Some believe that 4% is too low while others think it’s too high. People have added their own caveats and put it under a much finer microscope than I have available. If you’d like to learn more about it, try a simple google search and get lost down the rabbit hole.
When I first read about it, I thought, “great – so if I save a dollar, I’ll be able to spend $0.04 every year. That’s not even enough to buy a gumball. I would have to wait almost seven years before I had a quarter to put in the machine and get one lousy gumball!” That’s like having a 4-year old child attack you. The kid’s not going to do much damage. But what if I saved a dollar a week? 52 x $0.04 = $2.08. Just like fifty two 4-year olds could do a little damage attacking you, $2.08 could buy eight gumballs every year and leave a little extra. Take your eight gumballs and put another dollar a week into this experiment and you have $4.16, enough for 16 gumballs with a little extra! Now you can have a gumball every month for the rest of your life without having to do anything extra. Keep going like this, and at the end of ten years, you’re collecting $20.80 every year. That’s more than a gumball every week, and you still have the money that you saved ($520) if you want to give up the gumballs and spend it on toys, shoes, and gumballs for all your friends. Keep scaling this up, and now you have a million 4-year olds attacking you. One 4-year old attacking is cute, but if I saw a million of them coming at me? I’d run and hide!
Now you may be thinking, “why didn’t tell me it was so easy? I’ll just go invest a million dollars and live off the $40,000 it generates every year! By the way, do you have a million dollars I could have?” It’s easy to look at a big number like $1,000,000 and imagine it’s out of reach, thinking “I don’t have that kind of money, so there’s no point in even trying.” So don’t worry about the big number. Focus on a smaller number that you can work with. The great thing about math is that small numbers add up and become a big number. I’ve heard many different variations on this theme – “pennies make dollars” or “seconds make a lifetime” or “yards make touchdowns”. The great thing about getting started is that you can re-invest the interest, so it can earn interest too. A dollar a day builds to almost $37,000 in thirty years at a conservative 7% interest rate before you retire. If you withdrew 4% per year after that, you’d have $1,400 to take a nice little vacation EVERY YEAR. That’s using a very minimal example of one dollar per day or $365/year. The great news is that as you keep working and you get bonuses and raises, you can increase the amount that you invest each year. Start with $365/yr, then double it after ten years. Double it again after another ten years, and you would have over $64,000 at the end of thirty years! If you start withdrawing 4% each year, you would have $2,500 to take an even nicer vacation each year for the rest of your life! This is after investing just $1/day for ten years, $2/day for the next ten, and $4/day for another ten years. How do you get to a million dollars by the time you’re ready to retire? Invest $10,000/yr for thirty years. If you put that money into a savings account, it would add up to $300,000. Invest it and rely on compound interest, and you have over $1,000,000 in the same amount of time.
Then, for the rest of your life, pull $40,000 out of your nest egg every year and live a happy, healthy retirement!