Those four or five years as frugal DINKs (dual income no kids) can literally change your finances and your future family’s security. Take a look at the picture above, where do you see the most possibility for savings? Year 4 through 7 of course, especially after you add your 1st and 2nd hypothetical kids in year 8 and 10 (Shown in the red baseline). Note that this chart ignores inflation (it’s more curvy upward in reality), it’s a crude visualization. Of course this chart is just an example, but a lot of families who choose to have a stay at a home parent (if able to) follow this exact model.
You are likely a DINK in your 20’s, let’s say you are 25 for our example. Let’s also assume you will live to 75 years of age, meaning you have 50 years remaining for potential money growth. Of course if you compound anything to the 50th power it’s going to be insanely high, but let’s step back to when you are going to be age 55 (30 years from your starting age). Age 55 is a great place to consider as well, because for many, you will likely have a little life left in you. At age 55, hopefully you will still have the health to travel, maybe some grand kids on the way, and some hobbies/clubs.
If you saved a single dollar per month for the first five years, what would it be at age 55 if it was compounded at 8% monthly over those 30 years? Well first let’s talk about what you would have after the first five years.
Well after the first five years, you would have $74 saved up (of which you directly put in $60 through 60-$1 payments). Not very impressive, I mean anyone could just make a $74 contribution at the end of year #5, why even bother saving during the first five years at all?
Well let’s scale this up a little to add perspective. What would you have if you saved $2,000 a month for the first five years? You would have $148,000 at the end of year 5. If you didn’t save, do you think you would be in the position to make a contribution of $148,000 to your savings/investments at the end of year 5 to make up the ground? Probably not. You would likely have to start at that point and have to make it up with your time (via contributions over the next years). Time is the one thing we can’t buy more of (within reason).
Now let’s make this very clear right now, $2,000 a month is a huge sacrifice to lifestyle for those five years. So why is it so important to make the sacrifice early?
Because you would have $1,086,346 by age 55 while never contributing another dollar into that pool of money. Meaning you put in $120,000 over five years (and stopped all contributions) and ended up with over a million by age 55. If you continued to contribute $2,000 a month (maybe a pay raise during those first five years helps make this easier), you would have a staggering $3,001,079 at age 55. Once again, age 55.
Need more reasons?
- While you’re DINKs your expenses are lower and your income is higher (no child care costs). For many people, this five years or so is literally the best time they will have to save in their entire lives.
- In our example above, you would have $148,000 at age 30 and roughly $220,000 at age 35 (with no additional contributions). Think about the security that adds your household and your family.
- It isn’t always that the money you save in the first five years equates to spending only at age 55. Maybe when you are 37 years old, you need $50k to get yourself out of a real estate mess, a business, or a health issue. Having a few hundred thousand dollars could make a “life-ending financial money” into a “that really sucks” moment.
- The longer you wait, the longer it will be until you have that potential wealth, and if it’s too long, you won’t have your health to make the most of your money. The age 55 was specifically picked as an ending point, because much longer than that makes a lot more unknowns (health wise especially).
- It’s likely that by saving $2,000 a month, you actually have adopted a relatively modest lifestyle that is likely to stick past year 5. As long as you avoid lifestyle inflation, it’s likely you will continue to have additional wealth by practicing frugality in the first five years.