In a world of text message conversations, Amazon Prime delivery and social media likes, it’s easy to understand how society has become accustomed to instant gratification. It can make the long, steady process of growing wealth seem boring or unattainable. For most people, the only way to build wealth is by adopting a delayed gratification mindset with money.
Build Savings Muscles
It’s easy to opt for instant gratification when it comes to financial decisions. It feels good to spend money. However, you don’t experience the same reaction when you open the Amazon package or wear the new shoes compared to when you invest money in a Roth IRA. Building wealth is much like building muscle. It takes a series of repeated behaviors to get the desired results.
Depending on who you ask, the rule of thumb is to save anywhere between 10% and 20% of income for retirement. The specific percentage required for each person will differ based on their time horizon and goals. The more that you save early on, the better off you will be in the future. The sooner you commit to building that saving muscle, the more options you will have later on.
Bedel’s favorite rule of thumb for Generation NeXt clients is to save early and often, and there’s good reason for it. Assuming a 7% compound annual return, a 25-year-old must save $762 per month to accumulate $2,000,000 by age 65. Someone who starts their journey 15 years later, at age 40, must save $2,496 per month to reach the same outcome. It’s difficult to go from saving nothing to saving thousands a month.
Standard of Living
It’s easier to build strong savings habits at the onset of adulthood because you’re establishing your standard of living for the first time. Having a “save first” mentality allows you to back into how much you can afford when it comes to big monthly payments like housing and auto loans.
On the flip side, it’s difficult to scale back an already established standard of living to catch up on retirement contributions. Think back to the topic of gratification. Who wants to give up their golf membership to stay at home and save money?
Often, people push off changing their lifestyle to a future date and rationalize it by mentally allocating future raises, bonuses, or decreases in expenses. It’s wishful thinking, not action. If change is to be made, it has to be done in the present. Review the opportunity costs of unnecessary expenses and cut where needed. Re-allocate those dollars to automatic investments, like increases to 401k contributions or recurring transfers to an IRA/Roth IRA or brokerage.
Conclusion
Many people fail at fitness and financial goals. Don’t be that person! Take action today and see your “trainer” if you need professional help.
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We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.
