Why Saving Money Is a Gift to Your Future Self
In the 1989 movie "Back to the Future Part II," former school bully Biff Tannen gets ahold of a sports almanac with 50 years of sports statistics and makes a fortune betting on games he already knows the outcome of.
It's the perfect get-rich scheme. Having a time machine, of course, is a big help for Biff.
Since getting a time machine and an almanac from the future is unlikely, most of us will have to come up with other ways to give a gift to our future self. Biff already knew who the winner of the next World Series would be, but we don't.
One of the best gifts to your future self is saving money now. It can be for far enough in the future to be your retirement — such as saving with a 401(k) retirement plan — or as simple as saving money through automatic withdrawals from a checking account to a savings account so you can make some home improvements in a few years. (See also: Get Out of Debt? Why?)
One problem with saving for the future is that without a time machine, it's hard to see that far ahead and imagine where you'll be in 20 years or so. If you can just barely meet today's expenses, thinking about what you'll need in retirement can be overwhelming. But saving now in a 401(k), for example, will turn out to be the best gift you can ever give to your future self.
Compound returns favor the young the most, since they'll have the most time to earn more money from what they put away for retirement. The "rule of 72" helps determine how many years it will take to double your money at a given interest rate by dividing the compound return into 72. For example, if you invest $10,000 at 12% interest, divide 12 into 72, and it will take six years to turn that $10,000 into $20,000.
More important than compounding is how much you save — not the interest earned but how much of your income is going into a retirement account. The IRS allows up to $17,000 to be contributed to a 401(k) in a year, though people over age 50 can catch up with higher limits. Just by taking an annual raise of 3% and putting it into a retirement account so you don't see the extra money on a paycheck, you can get ahead of the crowd and get close to maxing out your contributions.
Most people are saving much less than they think they'll need in retirement. A series of surveys conducted by the Employee Benefits Research Institute found that while 26% of people think they'll need $500,000 to $999,999 in retirement, only 11% had saved more than $250,000. Only a third had saved $50,000 in 2010.
Even if the lackluster financial markets are causing your retirement accounts to drop, making regular contributions is still a smart move because you can buy more shares of a mutual fund with your money.
Few people want to work in their 70s. But longer lifespans, the housing and stock market crises, and people saving less for a retirement that seems far off may require more people to work in their golden years. Do your future self a favor — start saving now. Unless you can find a time machine and a sports almanac from the future, it's the best option you have.