You’re standing at an ABM when your 10-year-old asks for a new drone to fly in the park.
Money’s tight and you explain it’s more than the family can afford just now. But he points to the bank machine and says, “Just take out more money.”
Moments like these show the value of teaching kids about life’s start financial realities — that a bank machine isn’t a cash fountain; you can only take out as much money as you put in.
And, it’s an opportunity for a lesson in frugality and the advantages of starting to save at an early age.
Learning to save early in life is a lesson anyone can benefit from. It doesn’t matter if you’re 5, 15 or 25, setting aside funds for a rainy day pays off.
It can help you eliminate student loan debt, get into the real estate market and, once you pass those two milestones, start saving for retirement.
By lengthening your time horizon, a term financial advisors use for the time period between today and when you need the money you’re saving to live on, you can take advantage of the returns on your savings.
That happens in two primary ways.
The first is compounding, a phenomenon that takes place when the Interest from your savings is added to the money you’ve put away—and then earns additional interest on top of that. Over the decades, this can produce significant additional cash.
The second is return on investment. Investing early in funds, stocks or fixed-income investments allows you to benefit if the price of those investments increases over the long term. You can invest through TFSAs, RRSPs or what advisors call unregistered accounts. Talk to a qualified financial advisor if you need guidance.
It also helps if you can train yourself to see savings as a bill that you pay regularly.
You can pick a specific amount, say $200 a month when you’re young, so that saving becomes a habit. As you get older, you can gradually increase that sum.
Or, you can pick a percentage of each paycheque, say 5% at the outset, and gradually increase it as you get older.
Frugality’s only the first step
Developing financial discipline is one of the easiest ways to build wealth. As the old saying goes, the rich didn’t get that way by spending all their money.
And, frugality takes many forms—from limiting yourself to two or three dinners out each month to adopting a 48-hour waiting period to think over a splurge purchase. It also helps if you weed some of the spendthrifts out of your social circle, since they can knock your savings off course.
But being careful with money only gets you so far. It is one thing to not spend, and another to actually set that money aside in separate accounts you won’t access to pay household bills.
Learning to apply both steps of the process can help you reach your financial goals.
CPP Investments, investing today for your tomorrow.
The content on this site is provided for information purposes only. CPP Investments is not a financial advisor, and the content on this site does not provide financial advice. Every person’s financial planning needs are different. For advice on how you should prepare financially for retirement, please consult a credentialed professional financial advisor.