Thursday, November 18, 2010

Just joining the workforce? Start saving NOW!

I did a calculation over the last day or so that should be a wake-up call to everyone. If you get a good steady job, and save 10% of your paycheck each month, and if you invest very wisely in a way that earns you 10% in interest or dividends, it will take you 25 YEARS to have enough in your savings account to earn through interest or dividends what you are making from your job.

25 years. Wow.

Now, that's assuming a lot, like you don't get a raise or change jobs, that your finances are strong enough throughout that time period so you don't have to reduce how much you are saving, and that you stay on top of your investments to make sure that you are always getting at least 10% out of them.

The first assumption is actually a good thing. Most people earn more and more over their working lives as their wages go up or they find better jobs.

The second assumption is not as big as you think. Most employers make it pretty easy to save money out of your paycheck so you don't ever see it and so you can learn to live without it. But nobody goes through life without having some kind of problem that results in stopping or slowing your savings rate.

The third assumption is the hardest. It's not impossible to earn 10% in dividends or interest, but in any market situation it's not easy either. You have to keep an eye on what you are getting and make adjustments on the fly, day by day. I have a list of hundreds of stocks that pay dividends monthly, but only around 30 pay higher than 10%. And those that do might not keep doing so over a long period of time. Constant vigilance.

How are you doing in your savings plan?

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