Animal Spirits Podcast - Blog Post: How Much is $20 a Month Worth?

Episode Date: November 16, 2020

Ben looks at one of the hardest problems for most people when it comes to building wealth -- regularly saving money and shows why $20/month could be worth more than you think. And he has an announcement for his all new book about saving for retirement. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's Ben here. The following is a blog post called How Much Is $20 a Month Worth that I originally posted on my blog, A Wealth of Common Sense. Enjoy. The hardest part about building wealth for the majority of the population has nothing to do with picking stocks or asset allocation or active versus passive or the macroeconomy or any of the other stuff professional investors spend their time debating. The hardest part about building wealth for most regular people is the process of saving their money on a consistent basis. But it doesn't take that much to make a big difference over time if you're able to stick with a regular savings. plan. Even $20 a month could have an enormous impact if you give yourself a long enough runway. The maximum contribution for an IRA in 2020 and 2021 is $6,000 a year. That means maxing out your IRA would require you to save $500 a month. If you were to diligently save that $500 every month for 30 years, assuming a 7% return on your investments, you would end up

with more than $600,000 after 30 years of saving. Now, this is easier said than done for a variety of reasons, but that's not a bad haul. But what if instead of saving that same amount every month for three decades, you instead increased your savings by just $20 a month each year. So in year one, you'd save $500 a month. In year two, you'd save $520 a month. In year three, you'd save $540 a month and so on. $20 a month can't be worth that much, right? Actually, in this scenario, assuming a 7% annual return,

your ending balance after 30 years would jump from a little more than $600,000 to more than $860,000. That $20 a month increase would be worth more than $260,000 in total of it. Not bad. Now, maybe you think 7% is too high for risk assets right now. At 6%, that $20 a month increase each year would be worth close to $230,000. At a 5% return, it would be worth just over $200,000 in total. Of course, it's not realistic for all households to save $500 a month and max out their IRA at the moment. But $20 a month? That's a reasonable goal for most households now. What about $50 a month? or $100 a month.

If you were to take $50 a month right now and increase your savings by $50 a month each year, so start out saving $50, and then the next year you save $100, the next year you save $150, and so on, if you were to earn 7% returns on that over 30 years, that's worth $6,000. At a 6% return, $570,000,

and at a 5% return, $500,000. Now, if you were to start saving $100 a month today, and then next year, save $200, and the next year save $300, over 30 years, that 7% return is worth $1.3 million. Six percent returns would be $1.1 million, and a 5% return will be $1 million. This is real money. Now, maybe people eventually hit a ceiling with how much they can save.

Some people simply don't have the bandwidth to increase their savings by a set amount each year. But these examples show how you can start small and slowly work your way up in building wealth over time. You don't have to go all in right from the jump. Slowly but surely working your way up to a higher savings goal can be done, and it doesn't necessarily take a lot of money from the start. What it does require is patience, discipline, and a long enough time horizon to allow your assets to grow through the power of compounding and regular savings. I've been thinking a lot about this idea of saving lately because I've

just put the finishing touches on my new book called Everything You Need to Know About Saving for Retirement. This time around, I decided to go the self-publish route, so you can't pre-order it just yet, but I will be giving people on my email list a heads up before anyone else, so pay attention to your email if you're on that list, and I will let you know when it's ready to go. Right now, I'm tentatively targeting the week after Thanksgiving for the release. So I'll have plenty more to say in this book in the future and why I wrote it in the weeks ahead, but I just wanted to get this on everyone's radar. So thanks for reading everyone and have a great weekend.