I have a friend who when he finished university was going to travel Europe for a few months. He had $10,000 which he had saved while working during university, which he was going to spend on the trip before he began his career. The trip fell through, however, and he never did go. Instead, he started his career, and invested the $10,000.
My friend, who is a good investor, has averaged a 15 percent yearly rate of return on his investments over the past 20 years—since that $10,000 got invested.
That means that $10,000 has grown to about $160,000.
The math works like this. A single $10,000 investment at a 15 percent compound average annual rate of return grows to the following amounts over time:
10 years: $40,000
20 years: $160,000
30 years: $660,000
40 years: $2,700,000
50 years: $10,800,000
Would my friend have been better to have gone on the trip?
I’m not sure. Possibly.
The point is: every money decision we make has tradeoffs.
Spend and enjoy today or save for tomorrow.
Saving for Tomorrow
We want to and need to save for tomorrow. But we also want to live for today.
A balanced approach makes most sense for most people.
Going too far in either direction can lead to regrets, which we don’t want.
We want to live for today and have a bright financial future.
Balance
Balancing your saving and spending means living a balanced life.
Which means, financially, balancing your living expenses with your income.
In other words, living within your means.
This, ultimately, is the only way to save money: spend less than you earn.
And the only way to build financial wealth.
Savings
Financial wealth springs from savings not income.
It’s created by suppressing what you could have today for what you can tomorrow.
As Morgan Housel said in Psychology of Money:
Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or options in the future.
The $10,000 my friend had when he graduated university would have bought him a few months in Europe when he graduated. Today it has grown to buy him a few years; if it stays invested, it will buy him more.
This is the power that money saved today has over time, if invested.
Spending
Did my friend miss out on a trip? Yes. But he chose another avenue in life.
He chose to suppress that spending, and spend his money on other things, and save and invest the money he otherwise would have spent on the trip.
These are the spending decisions we have to make. And they have tradeoffs.
Bottom Line
Save some of your money and spend some too.
Balance living for today with saving for tomorrow.
As with most things in life, a balanced approach is best.