More Money, More Savings

Did you just receive a raise and feel like you won the lottery? Your first thought might be to buy that dream car you have always wanted or take that family vacation you might have been pushing off. While these items might be attainable now, you should consider increasing your savings and let your money compound over time. If invested correctly, you might be able to afford that dream car and go on your dream vacation. Here are some key steps you can take to ensure that you are saving properly and setting yourself up for more success in the future.

The first thing you can do is simply take the first step and begin saving money. If your target saving percentage is 20%, attempt to save 25% of your raise instead and overshoot your target savings goal. This will help you later in life when you might want to put a down payment on a house or take a vacation. It is easier to decrease your contributions when you might need to, rather than suddenly increasing the amount you are saving. If a need or an emergency arises and you have over saved instead of spending, you will be in much better shape than you would be if you had not saved at an early age. Holding onto cash might feel like a safe alternative, but you are losing money doing this due to rising inflation. The concept of time value of money which implies, a dollar invested today is worth more than a dollar invested tomorrow, will prove to be effective if invested properly.

Another key concept that young professionals can utilize is to save at an early age. If you put your money in an investment account at an early age, that money will continue to compound over time. Compounding growth allows your money to accumulate at a very fast pace. Below is a chart which shows the importance of saving early.

Source: Author's calculations via Investor.gov

As you can see, simply investing $200/ month at a 10% average annual return will continue to compound over time and be worth over half a million dollars in just over 30 years. While an investor is not guaranteed a certain annual return, you can still see the importance of investing your earning wisely and watching your savings compound over time. According to Marleen Lee. PhD, there are three key points to saving. The first key is to save early and consistently. Next, is to save more as you earn more. Last, is to review and monitor your progress. Monitoring your progress and fretting over small market dips are two totally different things. Do not fret over dips and changes in the market. Remember, you are in the market for the long haul. If you apply this concept to your future earnings, you will increase your chances of success and be content with the outcome. If you have questions on what to invest in or ways to invest your money, contact a financial planner!