Whenever people think of saving money, they think in terms of restriction. “Oh, that’s a dollar less I’ll have toward buying what I want,” they’ll say. On the other hand, when they earn more money, they think in terms of additional freedom — how that extra dollar will allow them to buy more of what they want. What they’re failing to realize is that both saving a dollar and earning an extra one can have the same overall effect on your well-being and ability to access the things you really desire. Both can buy you the same freedom. So, why do people prefer to make more instead of saving more?
Let’s think of it in these terms: Say you want to buy a new car, but need $3500 toward a down payment. To get the money, you can either work harder(either longer hours or by asking for a raise/promotion), or you can cut back on your expenses to save the same amount of money. (The third — and incidentally, worst — way to get the extra $3500 is through a loan.)
What would happen under each of these scenarios?
For convenience’s sake, let’s say you make $20/hr, or about $800/week(that’s about 41K – close to the US average income). To make the extra $3500, you’d need to work an additional 175 hours that year.
Alternatively, you could save that $3500 by saving about $10/day. If you’re aggressive and put the money you’re saving in the stock market, you could even have hundreds of dollars more at the end of twelve months (providing, of course, that stock market returns are near historical averages – we all know down markets happen sometimes). Even if you’re risk-averse and prefer to just sock it away in a high-yield bank account or a 1-year CD, you’ll still have about $30 above what you’d need. And you didn’t have to work any harder for it — the money was there, in your pockets, all along.
The worst possible scenario, of course, involves you taking out a $3500 loan for the downpayment. Assuming a 10% interest rate and three-year repayment term, you’re going to pay close to $1000 more. Yep, that’s right. You’ll pay about $4500, instead of $3500 — all because you didn’t just cut back, instead.
Of course, we can’t always afford to save every dollar we need. Sometimes, we’ll have to forestall making important purchases or make do with less. But saving at least part of what you need makes a huge difference in your bottom line over time.
What’s the best possible scenario, you ask? A combination of 1 and 2: Work a little harder to make more dough PLUS save what you need for the car. If you cut back $10/day and put that money in a savings account for a year, you’ll have your $3500, plus an extra $30, or so. Add the extra $3530 you got from your raise or longer hours(remember, you’re earning interest on that money, too), and you’re up to nearly $3600 in savings PLUS you’ve got the original $3500 for your car.
How’s that for making cents?