Start Saving, Your Financial Future Depends On It

By Larry Lane for InvestorZoo.com

Don’t have a rich aunt or uncle leaving you a large inheritance? Not making a six figure salary? No worries, you can still build a sizable portfolio. You will however need to be a consistent and prudent investor. If you're young and are a consistent investor, financial success is well within reach.

Stop Senseless Spending
Even relatively small expenses, such as indulging in a coffee from your favorite coffee shop every morning, can really add up and decrease the amount of money you have to invest. Larger expenses on luxury items, for example an expensive car also prevents many people from having money left at the end of the month.

In order to become wealthy you must adopt a more disciplined lifestyle and develop a budget. This means you’re going to have to make sacrifices somewhere. This may mean eating out less frequently, cutting back on extra, unnecessary expenses and shopping smarter.
This doesn't mean that you shouldn't go out and have fun, but you should try to do things in moderation. Most importantly, set a budget. If you start saving early, a sizeable nest egg only requires a few minor adjustments to your spending habits.

Fund Your Retirement Now
When individuals earn money, their first responsibility is to pay current expenses such as the rent, mortgage expenses, food, transportation expenses and utilities. Once these have been covered, the next step should be to fund your 401K or Roth IRA. Your left over money after you’ve paid your basic expenses should be spent on a combination of funding your rainy day/emergency fund. Your left over money is your fun money.

How much difference will funding a Roth IRA early on in life make?

If you're 23 years old and invest $250 each month in a Roth IRA earning 8% average annual return, you will have a retirement account of $985,749 by the time you are 65 years old due to the power of compounding. That’s an annual contribution of $3,000. Remember though, given a 3% annual inflation rate, your annual expenses will also double in 24 years.

Start investing, and start early.
Now, suppose that you wait an additional 10 years to start funding your investment. You've lost some time, so you contribute $5,000 per year. You get the same exact 8% return and you want to retire at age 65. When you reach 65, you will have saved $724,753. That’s over $260,000 less that you could have had if you started 10 years ago.

Own Your Home
At some point in our lives, many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren't sure where we want to live for the longer term. However, renting is just not a good long-term investment. Walk away from your apartment or rental and you own nothing. Buying a home can be a good way to build equity and wealth. In addition, you’ll be diversifying your overall investment portfolio.

Unless you intend to move in a short period of time; usually 5 years, it generally makes sense to consider purchasing a home; providing you are adequately funded.

Avoid those expensive cars
There's nothing wrong with purchasing a luxury vehicle. However, individuals who spend an inordinate portion of their incomes on a vehicle are doing themselves a disservice especially since this asset depreciates in value so rapidly. Obviously, this depends on the make, model, year and demand for the vehicle, but a general rule is that a new car loses 15-20% of its value per year. Consider checking Consumer Reports or an opinion web site specializing in automobiles for depreciation information. If possible, pay for car in cash and save on interest payments. Your retirement account will thank you many times over. Never lease a car unless you own your own business. Chances you’ve put down a sizable deposit which you will not get back. At the end of your term, you walk away and own absolutely nothing. Stop buying into immediate gratification and sacrificing your long term security. When you purchase a car, you own it. When it is time to trade it in or sell you own an asset to sell.

Wrapping in all up
You don't have to win the lottery to live comfortably in retirement. For most people, the only way to achieve this is through consistent savings and investing. Start early and develop your savings habit.

Larry Lane is the head blogger and biz dev for InvestorZoo.com, a social networking site dedicated to personal finance.
Are you a financial professional looking to help people with money issues and gain world wide exposure? Please drop me an email at larry.lane@InvestorZoo.com or call me directly at 425-591-9315.
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