With recession and slow global growth being the order of the day, it is now more important than ever to chart out a financial plan for yourself to ensure a smooth lifestyle. However this article specifically deals with the importance of saving money for young college graduates, so we will focus only on them for now.
The trend of instant gratification that has come up recently is starting to hurt the financial lives of many innocent youngsters who dream of having a big savings kitty one day but don’t do anything much about it. What’s worse is that most college pass-outs tend to focus on the present, and spend money carelessly, without realizing the need to save in order to achieve financial independence as soon as possible. If you belong to this group, then it’s imperative for you to think long term and get rid of this killer habit of instant gratification. Here is why you should focus on saving money:
The Power of Compound Interest
The longer you delay saving money, the more it is going to hurt you in the long term. The reason is simple – the power of compounding won’t work in your favor. For those who aren’t aware, compound interest is truly the eighth wonder of the world as it can grow the value of your money over time and help you build a large corpus.
It’s best to start as early as possible to take advantage of this. Here’s an example of the impact a delay of few years in savings has. Suppose Jim and Tim (both 25 years of age) are two buddies who graduate out of a B-school, and each of them lands up with a decent paying job that pays them well enough to start saving right away. However Jim is too elated on getting a job and wants to enjoy his life for a few years, without worrying even a tiny bit about saving money while Tim acted more wisely and decided to invest $1000 for 20 years and then let his savings grow in an instrument that pays 10% per year. On the other hand, Jim spends money ruthlessly for five years after graduating and then starts investing $1000 per year for the next 20 years at 10% per annum.
Though you wouldn’t expect to see much difference in the corpus amount of Jim and Tim, the results reflect a different story altogether. Jim builds up an impressive final corpus of 7,65,700 but Tim gets far ahead, with a massive corpus of 12,33,170! If this money stays invested for another 10-15 years, the difference would get much bigger, and Jim wouldn’t even come close to Tim by retirement time.
Now it’s for you to decide which one of them you want to be, Jim or Tim!
Final Advice: Start saving early and start small if you can’t save too much. Even $100 per month would add up over time and compound interest will take care of the rest.