Last year I was privileged to meet personal savings blogger Cath from Get Money Wise. I was excited to discover that she had also been part of the Simple Savings movement. We also shared a love of property investing, and are both naturally frugal. Cath really lives in the good life, made possible by good money management. She and her family have just done a sea change to Coffs Harbour, where they were able to buy a home mortgage free.
I wrote this guest blog post for her site last year, and I am sharing it now on my blog with her permission. It delves into the miracle of compound interest, and why saving is much more important than earning. You might not think that the little things add up, but they really do.
“My goal is to become a billionaire. My stepping stone goal is to pay off my mortgage. Then I want to grow my net worth to one million (who wants to be a millionaire? I do!), then to double that to have $2 million net worth by 2020.
How will I get there? I have a few ideas but to be honest, I don’t really know yet. But my mantra is “one dollar at a time”.
Yes, one dollar. Every single dollar counts – especially when it is saved and invested.
Note from Cath: This is a great approach to take. Breaking down your goals into achievable steps can make the goal feel that much more achievable.
Think how hard you must work to earn the money you make. Ah ha, but one dollar is not really one dollar. No. You pay taxes on that dollar. You might have to pay petrol and car rego or money for buses to get there (unless you have flexible working arrangements or cycle to work – but even then there are hidden extras with time and use of personal equipment).
You might have to spend money on suitable work clothes (unless you have a cool high-tech job where you can lounge around in jeans, or can work from home in my pyjamas). You probably spend more than you would at home on things like coffees and work lunches. And then there is unpaid overtime.
Note from Cath: Starting to get depressing now? My poor one dollar is dwindling. Don’t worry, the next part is where it gets exciting!
But one dollar saved can be more than a dollar. Just think about it. My mortgage is currently only 3.74%. If I pay one dollar off my mortgage, my $1 is worth at least $1.03.
And that doesn’t take into account the interest saved over the course of the loan by repaying early, e.g. if I pay a 25-year mortgage in one year there will be huge interest savings.
Just try crunching some numbers yourself about what an extra $1 a month could mean over the course of your mortgage or other debt. (Note from Cath: My Mortgage Extra Repayments Motivator can do just this) There are many variables so it is difficult to say conclusively that $1 equals a certain amount.
And what if I invested that dollar? Say I put it into index funds or shares or a high interest bearing account that (assuming all went well) returned at least 5% a year. That would mean that my $1 became $1.05 in the first year.
And then there is compound interest. Say you added to that $1 every month. In the course of the year would it equal $12? No, assuming 5% interest you would have earned a whole extra dollar and your savings would be worth $13.
If you invested $1 a month for ten years, your dollar would be worth $157 and you would have earned $36 in interest. Once you have a decent mass of savings in place, the compound interest will look after itself. (Note, for these calculations I used this very handy compound interest calculator)
Of course, once you realise an investment (e.g. sell it) you do have to pay taxes. And if you spend it, it is gone. But in general, one dollar saved is so much more than one dollar earned.
And by focusing on the small things in a mindful way, I am adding to my trickle of single dollars until they become a vast ocean of abundance.”