Let’s flash back about 10 years, back when I was 16.
Like every 16 year old guy, I wanted to get a car. I imagined just how free I’d be. I could go out to the golf course whenever I wanted. I could drive to my buddy’s house across town, instead of having to depend on him to make the trip over to my house. I could even take girls out for dates, conveniently forgetting that talking to girls scared the crap out of me. Yes, I was going to be the man.
I sat down one day and started to crunch the numbers. There were so many expenses, but undaunted, I crunched on. There was the cost of the car, a number I conservatively set at $3000. Insurance was a minimum of $250 per month since I was a rookie driver living in a province where there were no government controls on auto insurance. On top of that, there was gas and repairs. To summarize:
Total cost year 1: $7400
Total cost per year after: $4400
I was just starting to get into investing at this point, so I was familiar with compound interest. I started to crunch the numbers. What if I took that $7400 and invested it, earning an 8% return and kept compounding it until I retired at age 65?
I’d have $321,362! As a 16 year old kid working at the local Dairy Queen for $5 an hour, this seemed like all the money in the world.
I continued the thought process. What if I delayed getting a car for 5 years? How much would I end up with?
Year 2: $176,926
Year 3: $163,820
Year 4: $151,685
Year 5: $140,449
The numbers astounded me. If I didn’t get a car, I’d end up with a nest egg of $954,000. If I added just $1000 to the total each year or assumed a 9% return I’d end up a millionaire.
Never Underestimate Compound Interest
A common refrain in the PF community is the lackluster job our schools do teaching kids about finance. While I agree my financial education was lacking, I did learn about compound interest, as well as other basic topics. Because I learned interest compounds exponentially, I knew starting earlier was better than starting late. I was finally figuring out why my Dad was pushing me so hard to save my money.
Most teenagers would choose to get the car anyway. A car today would trump a million dollars down the road for most teens; after all, they’ll have plenty of time to make money as adults. If parents took the time to crunch the numbers with every teen that wanted a car, maybe we’d have more teens who choose to walk and invest for long term growth.
Small Sacrifices Can Make You Rich
If you start young, small sacrifices can have a huge impact on your finances. I managed to do without a car until I was 24, I like to explain to people I was funding my retirement by doing so. I lived in my parents’ basement until just after I turned 25. I saved tens of thousands of dollars by not getting my own apartment.
What excess can you cut from your life? Just about every single person can save money, it’s just a matter of sacrifices. I didn’t take a day off work for a holiday for 7 years. I wore underwear with holes in them until they could be replaced as a birthday gift. I worked nights, because it paid more and because if I slept during the day I’d spend less money. I could list a hundred more examples of things I did to maximize my savings because I was serious about becoming rich.
Are You Actually Serious About Wealth?
Perhaps my example is a bit extreme. I didn’t go to college, I worked directly out of high school. A student who lives far away from University can’t really live in their parents’ basement. I get all that. The point is, I was serious about growing wealth, so I made sacrifices in my life. If you’re serious about it too, you’ll find excess fat to cut from your budget.
And if someone isn’t serious about it, that’s okay too. They can muddle along, paying interest on credit cards, financing vehicles and the like. If that’s the path they choose, then they can’t complain about having a lack of money. You can’t have it both ways.
There is a very simple way to get wealthy. All you have to do is spend less than what you make, for a long period of time. For various reasons, people just aren’t patient enough to do it.