What if you didn’t start saving early? Advice for late bloomers

“Saving is the key to wealth,” I wrote last week while trumpeting the extraordinary power of compound interest. “If you do not spend less than you earn, and if you do not save the difference, you cannot build the wealth you desire.” The younger you are when you begin saving, the more time compounding has to work in your favor, and the wealthier you can become. “The next best thing to starting early,” I wrote, “is starting now.”

Other Options

A few readers noted that while the mathematics of compounding make sense, it's not motivational for those too old to take advantage of its full force. “This is pretty depressing for those of us who spent our 20s with practically no income thanks to universities,” wrote one commenter. Her sentiments were echoed by several others.

It's important to note that saving is not the only smart thing you can do with your money. Your education is an investment, too. Yes, you should begin to save as soon as possible, but there are other good options, too.

My friend Joel is in medical school. I haven't talked to him about his personal finances, but I doubt he has much saved right now. He lives a frugal lifestyle, but that's out of necessity. He doesn't have an income that allows him to splurge or to save. But Joel is obtaining an education that will pay dividends in the future. He'll leave school with huge debt, but he'll also have tremendous earning power. And he loves his work.

There are times when it makes sense not to save. Save when you can, but don't sacrifice your happiness or your future to fully fund your Roth IRA.

Past, Present, Future

What if you didn't start saving when you were young? What if you could have saved, but opted not to? What if, like me, you find yourself approaching 40 with the bare minimum of retirement savings. What should you do?

First, don't beat yourself up over the past. There's no sense fretting over choices you made when you didn't know better. Do I wish that I'd saved for retirement instead of buying comic books and computer games? Absolutely. But what's done is done.

Instead, structure your present so that it matches your priorities. If you've decided that saving is important, that you want to put your money to work in the stock market, then make moves in that direction. Open a Roth IRA. Set aside $50 or $100 or $200 a month.

If you look at your current situation and still don't think you can save for retirement, that's fine. Sometimes other things take priority. When you're choosing between funding a Roth IRA and attending university, both are excellent options. (I would prefer the education.) But when you're choosing between a Roth IRA and a new car, I believe saving for retirement is almost always the right choice. Be conscious of the trade-offs you're making. You can't have everything.

Finally, set goals for the future. The road to wealth is paved with goals — they are the fundamental building blocks of success. When you know what it is you're trying to achieve, you can steer your life (and your finances) in that direction.

For example, I want to write from home. I've spent the past year arranging my life to make this possible. My future financial plans also reflect this. (That's one reason we're accelerating our mortgage payments; if I wasn't self-employed and working from home, this might not be a priority.)

Happiness is More Than Money

If you didn't start saving when you were young, don't panic. Examine your priorities. Set goals. Structure your finances to reflect what it is you hope to get out of life. Saving is important — and you should begin as soon as possible — but it's not the only component of personal finance.

Last year, Scott Adams (of Dilbert fame) wrote about his Happiness Formula:

Happiness = Health + Money + Social Life + Meaning

Whenever I feel bad about my financial situation, I remind myself that money isn't everything. It's only one part of the Big Picture. I'm actively working to improve my relationship with money, and that's what matters.

There is no one right answer. Do what works for you.

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Finally Frugal
Finally Frugal
12 years ago

J.D., as a direct result of your previous post about compound interest, I starting considering what I would do with my extra cash after I’ve paid off my CC debt (September!) Instead of throwing the entire amount at my student loan debt (most of which is in deferral at the moment) or at my second mortgage, I’m thinking about increasing my 403b to 10% and another 10% to a Roth IRA (until it’s maxed). I’m trying to learn about the best mix of equities to make my money grow even more quickly. I feel like I need to take better… Read more »

Wayne Mulligan
Wayne Mulligan
12 years ago

Wonderful point J.D.: “If you’ve decided that saving is important, that you want to put your money to work in the stock market, then make moves in that direction.” Just to expand on that for a bit — putting your money anywhere but a savings account (aside from requiring a certain level of cash on hand for purchases/emergencies) makes a lot of sense. Reason being – if you keep your money in a low yield savings account, you’re actually LOSING money each year due to inflation. Let’s say inflation is at 2% (historical, long-term average) and your savings account is… Read more »

MossySF
MossySF
12 years ago

With many lamenting about how school or student loans make it hard to invest early in life, that does say that people should starting thinking about this even earlier. High is the time to decide what educations are worth the money and what you can do do decrease the cost. Perhaps it’s AP exams or community college. Or it’s studying extra hard to get scholarships. Or it’s picking the local state university. Or perhaps it’s taking 6 years instead of 4 so you can work more hours. Unfortunately, expecting inexperienced 15-16 year olds to be able to make a smart… Read more »

SavetotheFuture
SavetotheFuture
12 years ago

I’m in my early 20’s and I am aggressively funding for retirement. Sometimes I feel almost obsessed with it. I’ve learned to step back and look at the big picture of life. Things like being with my family and friends, doing activities I enjoy, and being in good health should always be as, if not more important than money. I think that the equation that you give for happiness hits the nail right in the head. You need all of them to reach your full potential of happiness.

Get a Grip Girl
Get a Grip Girl
12 years ago

I started late too…at the age of 36. In my twenties I just wasted it all away. My mum and dad were frugal, always reminded me of savings but I did not see the big picture. I had a college degree by 24, started working and earning higher than anyone around me….but where is all that money? I have no clue. I did not even invest in a house or a car. They paid for my car as a graduation gift, so this meant I had no sense of value for money. I asked myself a question all the time…had… Read more »

Hannah
Hannah
12 years ago

One thing I think would help tremendously is if schools started implementing personal finance courses. The only time I ever learned about finance in high school was in a class aimed at personal development, where we were told “if you save now you’ll have more money when you retire”. There were no numbers involved, nothing. Kids need to be taught about finance, and taught early in order to get into the game as soon as possible. I’m 19 years old right now and I’m well aware that when I’m 65, old age security will no longer exist. It’s too bad… Read more »

Mydailydollars
Mydailydollars
12 years ago

Great advice. I do think it’s important for those of us in our thirties to quit worrying about the mistakes of the past. Onward and upward! I’m happy that the saving impulse is finally kicking in for me.

I agree with Hannah; more serious education efforts can help. With all the bad influences out there, students need to hear the good advice as much as possible!

The Weakonomist
The Weakonomist
12 years ago

Also keep in mind that no one ever said you have to retire. Until the 20th century, you worked until you died.

Both of my parents are capable of retiring now, but I can’t see my mom stopping until she hits 70. Dad? He’ll probably continue to be a professor as long as the university allows him, which will be forever.

Those old enough to take centrum silver can also count on social security, I can’t.

To Hannah, I’m right there with you:
http://weakonomics.com/2008/03/22/working-with-teens-teaching-personal-finance-on-a-high-school-level/

Vered@MomGrind
12 years ago

Happiness = Health + Money + Social Life + Meaning

Wow. I wonder…does that mean that if you have excess amounts of one of the components, you can have less of the others and still be happy? If so, that could explain why some people, who have a strong sense of spirituality but no money, are still happy and content.

leigh
leigh
12 years ago

wow, i got quoted!

really, i was just thinking of the immediate numbers in front of me and not how education is an investment in itself. and how it levels the playing field by increasing income potential over one’s lifetime.

i know you get good returns on (reasonable) education dollars, but those numbers were still just a little stunning.

Jesse
Jesse
12 years ago

Vered I think he meant a balance of all of those… and I don’t think there is any doubt that you must have at least a LITTLE of each to be happy.

Faculties
Faculties
12 years ago

@8, no one says you have to retire, but some times ill health strikes. You want to be prepared to pay your bills even if you’ve had a stroke or been diagnosed with cancer and can’t work. Counting on being ablebodied and working until you die of advanced old age is a very risky strategy.

Aaron Pinkston
Aaron Pinkston
12 years ago

“Be conscious of the trade-offs you’re making. You can’t have everything.” I’ve come to realize that there is cost and risk in every decision. We are forced to make decisions at every turn. We can make them by habit or with our mind. Usually the costs and risks are negligible; sometimes they’re not. Sometimes, the minor things begin to add up, and we need to change our habits or mind to change the direction of our path. Becoming aware of the costs and risks, and learning to make sound decisions based on what you know and value is a major… Read more »

garry
garry
12 years ago

I had reached the stage in life where due to a relationship break up and loss of my job due to work related injury, I didn’t have much left to fall back on to. That was the catalyst for me to take charge of my own destiny and start pouring all my effort and time into becoming the master of my own destiny. Life is getting better by day.

Leonard Klaatu
Leonard Klaatu
12 years ago

Good job, JD.

Debt-free living is a reasonable goal for everybody. It can be done if people will maintain reasonable expectations.

And I’d have to echo the importance of health. Prepare for future good health just like you’d prepare for a good financial future. PREPARE, PREPARE, PREPARE. And start now!

Curt at PennyJobs.com
Curt at PennyJobs.com
12 years ago

@Hannah Financial education is the key to position your family for the future. But, I’m not convenced that it is the schools responsibility to teach financial education. Its everyones responsibility to get the financial education they need. Pointing to the schools is shifting the blame. Each one of us is responsible for our financial decisions and should not ask government or schools to provide every need. We are growing more and more reliant of the government to provide our every need – which has created our national debt and put the country in the financial crisis we now face. If… Read more »

Daniel
Daniel
12 years ago

I have to disagree with you on this post, JD. At least in terms of urgency. If you haven’t saved anything when approaching 40, you need to make changes, quickly, or plan on living on crumbs later in life. And by nothing saved, I mean no house equity, no pension, no retirement savings. Consider the numbers… How much cash do you need to pay for your current lifestyle for the next 30 years? For simplicity’s sake, take your current income, and multiply it by 25. Seem overwhelming? Maybe you can live on half your current income. Hmm, that’s still a… Read more »

byron
byron
12 years ago

Hi JD – I love your site. I’m in my late 30’s and recently purchased my first home. I took out two mortgages (an 80/10) to avoid PMI payments (which at the time were, to my understanding, not tax deductable, but apparently now they are). The 10% loan is not ‘good’ debt – it is a ‘balloon’ loan of 7.9% amortized over 30 years but due in 15 years. This was a fairly stupid loan in retrospect, but there was some confusion that went on with the loan negotiation and the entire home buying process. I’m trying to aggressively pay… Read more »

Dawn
Dawn
12 years ago

I agree that there has to be balance and that it’s not all about your savings. The savings and debt-payoff bug bit me about 2 years ago and I tore off like a machine, finally, at the age of 30. Problem was I was skimping in important areas (healthy food, exercise, etc.) in order to pay down debt and bank cash in savings but not looking at the big picture (i.e. why bother saving like a madwoman if I’m going to end up sick, overweight, without a social network, etc.) That all culminated in the last 3-4 months and since… Read more »

TosaJen
TosaJen
12 years ago

One suggestion for folks who haven’t started saving much, and don’t see the point; or for those who don’t see the point of saving at all, because you might die, or you plan to work until you die: Think about how different your life would be if you could choose whether to work or not. Imagine you had enough savings RIGHT NOW to make a decision whether you’re willing to deal with Hell Boss or Arbitrary Deadline, or Stupid Coworker one more day. Imagine being able to sigh with relief and take a vacation if you get laid off instead… Read more »

Jon
Jon
12 years ago

Quick question… I found out that my mom, who is a public school teacher, has access to a 401(k) plan, a 403(b) plan, and a 457(b) plan. I’ve read that you can contribute the maximum to a 457(b) and also a 401(k) or a 403(b) (one or the other). Is that true? If so it’s a great way to save for late bloomers who happen to be public employees! Between that and my dad’s 401(k), plus the catch-up provision for being over 50, they could be saving somewhere around $60k per year! Plus more in IRAs I suppose, so about… Read more »

AJC @ 7million7years
AJC @ 7million7years
12 years ago

You simply can’t save your way to wealth because a little creature called INFLATION is always nipping at your heels!

In fact, $1,000,000 in 20 years will produce the equivalent of $15k salary today.

So, I would make a slight modification:
“INCREASED INCOME is the key to wealth … SAVING is the key to keeping it!”

Andy
Andy
12 years ago

Great post, as was the one before on Compound interest (CI). I have written a number of times on CI and even though time is a big factor in it, better to start late than never.

Kim McGrigg
Kim McGrigg
12 years ago

Thanks, I really needed this.

I’ve been working on making some financial changes this month and I have come to the realization that I am not going to meet all of the arbitrary goals that I set when I was a very optimistic (and broke) 20-something (like you, I am going to be 40 in the not so distant future).

Still, I agree that it is never too late to redefine financial success.

After all, in the not so distant future, we are going to be 60. 🙂

Kim

SavetotheFuture
SavetotheFuture
12 years ago

I’m in my early 20’s and I am aggressively funding for retirement. Sometimes I feel almost obsessed with it. I’ve learned to step back and look at the big picture of life. Things like being with my family and friends, doing activities I enjoy, and being in good health should always be as, if not more important than money. I think that the equation that you give for happiness hits the nail right in the head. You need all of them to reach your full potential of happiness.

Rob Madrid
Rob Madrid
12 years ago

Get a Grip Girl, could be worse, you could be 50 and wonder what you did with all your money:(

Here’s somethng most people, including myself, don’t think about.

Up to 60% of portfolio growth may come after retirement

That is very true of my Dad, most of his growth in his stock portfolio has come after he retired. He also started saving at 57 and did quite nice. Having a defined benefit pension plan helps.

plonkee
plonkee
12 years ago

@Jon:
That’s right, I think [email protected] fivecentnickel.com has covered it as he has both.

(Once again proving that reading personal finance blogs can teach British people more than they ever need to know about US tax laws.)

Ross Williams
Ross Williams
12 years ago

I’m 19 years old right now and I’m well aware that when I’m 65, old age security will no longer exist. Which is evidence that the fearmongers at least are doing a good job of “educating” young people. While matching an employers contributions to retirement may make sense for some young people, the fact is there are far better things to do with money at that age than paying for their retirement. For most 19 year olds, their highest earning years are well ahead of them. Rather than saving, it makes sense for them to be going into debt to… Read more »

getagrip
getagrip
12 years ago

Too many of us wish we could set the clock back and make some profound changes. But we can’t, and there is something to being young and experiencing things for the first time. I’d recommend focusing on just a few things like: avoid stupid debt by asking if you really need something before you buy it, put a little of everything you make (even if it’s only $10 a week) towards the future and don’t touch it, and finally that if you want something (vacation with friends, travel abroad, etc.) be smart and save for it if you can and… Read more »

Judi
Judi
12 years ago

At age 48 I had NOTHING saved for retirement. When I thought about this and would have anxiety attacks I consoled myself by reminding myself that at least I had equity in my home. Of course we know what has happened with that. At about this time almost two years ago in 9-06 I received an offer from ING for $25.00 to open a savings account. Thus begun my start. I had to send in a cancelled check to receive the $25.00 so I decided then that I could afford to add $15.00 and begun a account at $40.00. However,… Read more »

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