It’s no secret that many people struggle with their finances. Just a couple of years ago, the Federal Reserve found that roughly 37% of U.S. adults wouldn’t be able to cover an unexpected expense of $400 without borrowing or selling something. Some weren’t sure they’d be able to pay that much at all.
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The problem with this is that unexpected bills come up all the time. Whether those are medical expenses or a flat tire, the last thing you need is to end up in debt just to cover the bill. Having even a little money set aside in savings or an emergency fund can keep you from having to take on debt. And once you’ve built up a substantial nest egg, you won’t have to stress so much about the little things.
In a recent online interview, NYU professor Scott Galloway talked about the most common mistakes he sees young people — those in their 20s — make and how they often don’t know how much money they’re spending or the repercussions of using credit to finance their purchases.
Fortunately, Galloway proposed a solution: Start saving early on and do it regularly for the long haul.
Earning passive income doesn’t need to be difficult. You can start this week.
Set Aside $100 a Month
In that interview, Galloway gave one key piece of advice to young people: Get into the habit of regularly saving money. Even if you start small, your future self will thank you for it later.
“If you get used to saving just $100 a month…you’re immediately in the top 10% of most financially responsible people in America,” Galloway said. “Most people can’t do that.”
If you don’t think saving just $100 a month will put you ahead of others financially, you might need to look at it from a different angle. Say you start saving that amount each month starting at the age of 25 until you’re 65. Without considering interest, you’ll have $48,000 in 40 years.
But the smarter move would be to use an account that bears interest — ideally, compounding interest — so that your money will grow more quickly over that time. Here are a couple of examples of how much money you could have after 40 years of consistent saving based on the average annual return of the account you use.
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Say you use a high-yield savings account (HYSA) with 4% APY (annual percentage yield). If the interest rate compounds once a year, you’d have about $114,030 by the time you reach 65.
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Now, saw you instead invest that money in a stock portfolio with an average annual return of 8%. You’d have about $310,867 when you hit 65. For every additional year you save, you could earn about $30,000 more annually.
If you were to boost your savings amount at any point during your life, such as when you start earning more money or have fewer expenses, you could increase your total savings — and returns — exponentially.
If this doesn’t seem like a lot, look at this way. The Federal Reserve found that the average senior American’s (ages 65 to 74) retirement savings balance was just $200,000 in 2022. Assuming you don’t make any changes to how much you save, but you do use an investment portfolio with an 8% average annual return rate, you’re already ahead of the game.
But what if you did increase your savings amount? Here’s an example of how that might look:
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You save $100 a month for 10 years (starting when you’re 25) using an investment portfolio with an 8% average return rate. You’ll have $17,383 by the time you hit 35.
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Now, say you’re able to save $200 a month in that same account for the next 30 years (until you’re 65). You’ll have an estimated $447,000.
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Tips To Get You Started
Starting the habit of saving can be tough, but it gets easier as you go along. Here are some quick tips to get you started.
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Set up automatic savings so you don’t miss a month.
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Keep your overall expenses low so that you can comfortably save the $100 each month.
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Take advantage of high-yield accounts. This could include tax-advantaged retirement accounts like IRAs or 401(k)s.
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Don’t leave your money in a standard savings account (unless you need quick access to a small sum for emergencies).
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Increase your savings contributions as you start making more money.
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Avoid financing any purchases with a credit card or loan. Only buy what you can afford so you don’t get hit with high interest fees. For things like a car or house, try to have a larger down payment and shop around for the lowest interest rates possible.
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This article originally appeared on GOBankingRates.com: Just One Money Move Could Put You in the Top 10% of Americans Financially, According To Money Expert Scott Galloway
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