5. I’ll Save More in the Future
We often tell ourselves that we will save more in the future, believing that our income will increase or expenses will decrease. However, this is merely an illusion. If you don’t save 10% of your income today, it’s unlikely that you will start saving more tomorrow, even if your income rises.
For instance, if you earn $30,000 monthly and save nothing because it barely covers your expenses, a salary increase to $40,000 is unlikely to result in saving $10,000. Instead, you might upgrade your wardrobe or buy a new flat-screen TV, as higher income allows you to afford items previously out of reach. The truth is that the present is your only ally; if you don’t start changing your perspective on money and begin saving today, it will be difficult to do so in the future, even with a higher income.
6. I’m Too Young to Worry About Retirement
Many young people believe they have ample time to consider retirement, choosing instead to enjoy their current lifestyle. However, this is a grave mistake. Understanding the concept of compound interest highlights that time is perhaps the most crucial variable. Each year you postpone saving and investing can be quite costly.
For example, if you start investing $5,000 monthly at a real interest rate of 6% annually from age 25, by age 65, you’ll have nearly 10 million pesos. However, waiting just five years (starting at 30) will result in only 7.5 million pesos. Delaying it further until age 35 will leave you with a mere 5 million pesos. The difference is significant. Waiting for age to force you to act and start saving is one of the worst financial mistakes a person can make.
7. There’s Good Debt and Bad Debt
I, too, have fallen for this misconception and written about good debt and bad debt. The key is to understand that debt is a tool requiring careful handling, as it ties you to future payments and limits your financial freedom.
However, as with most things, there are degrees. A low-interest loan with a clear purpose (e.g., a valuable master’s degree) or financing for expanding your business production line, where demand is present, can be worthwhile.
Rather than labeling debt as “good” or “bad,” one should first consider if they can afford it and whether the expected benefits outweigh the long-term cost of that credit.
In the master’s degree example, if it potentially increases your income by 40%, it might be worthwhile. However, high-interest debt or one that requires years of work to repay is likely not a good decision.
The crux is understanding that any credit is an obligation. Ensure you fully comprehend its implications, pros, and cons before acquiring it.
Key Questions and Answers
- Q: Why is it difficult to save more in the future? A: It’s an illusion to believe you’ll save more in the future simply because your income will increase. Expenses typically grow with income, not savings.
- Q: When should one start saving for retirement? A: The best time to begin saving for retirement is when you start earning money from your first job. Postponing this can significantly impact your future comfort.
- Q: What is the significance of time in financial planning? A: Understanding compound interest highlights that time is a crucial variable. Each year you delay saving and investing can be quite costly.
- Q: How should one approach debt? A: Debt is a tool that requires careful handling. Before acquiring any credit, understand its implications, pros, and cons.
