“I’ll just save more when I earn more”.
Many people think that it is easier to save more when you start earning more. Although that might be true, there are opportunity costs you incur when you only start saving more after you earn more in the future.
It might be difficult to save a significant portion of your income when you earn a relatively low salary. This is especially so when you are still studying or when you first enter the workforce. Although you might not have any major bills or big-ticket items to pay for at the moment, you should still save up to buy a house, to build an emergency fund or to pay for your holiday overseas.
Earning more is always a boost to your financial situation. However, saving prudently should not only come about when you begin to earn more.
Here’s why you cannot think of saving only when you earn more.
When you start earning more, it usually comes with more responsibilities you are likely to be in a different stage of life compared to when you were younger and earning less. You might have housing loans to pay for, bills to settle, children to provide for and your elderly parents are in retirement and reliant on your income.
A higher salary at that point would only go towards paying for these essentials rather than into your savings. Hence your capacity to save might be much lower, in spite of the higher salary that you earn.
Habits Are Difficult To Change
Your monthly expenses are affected by the type of lifestyle you lead. Whether its 10%, 20% or 50% of your salary, saving what you can early on in your career creates a habit of saving a portion of your income. Even if this means having to lead a more frugal lifestyle and having to put off an indulgent purchase to a later date, it would help you accumulate a good amount of savings for the future.
Rather than getting used to spending a large portion of your salary, saving a portion of your income from a younger age creates a good habit for yourself to follow in the future.
We often think that as our income increases by $1,000, that means that we would be able to save an additional $1,000. However, lifestyle inflation is a phenomenon that will affect how much you end up saving. With lifestyle inflation, as your income increases, your spending increases as well. This is a major reason why we are unable to save more when we earn more.
You might spend more on luxuries to treat yourself when you earn a higher pay. This could be for a number of reasons, ranging from having more financial responsibilities to take on or simply to upgrade your wardrobe.
Maximize Your Time By Compounding Your Savings
Starting to save from a younger age gives you a longer time horizon to compound your returns though investing. There is more time for your savings to grow through the power of compounding returns.
This graph by Business Insider shows how big the difference can be when you start saving 10 years before your peers. Rather than only saving when you earn more, starting to save as soon as you start working helps you accumulate more wealth in the long run.
Always Good To Have A Safety Net
Starting to save even when you have a small salary would help you create a safety net for yourself to fall back on. Should an unfortunate situation arise such that you require a large amount of money, your emergency funds would help you tide over difficult times, especially when you find yourself out of a job.
What you do with the money you save is also important. Rather than have it sit in a bank with less than 1% interest, you should start your investing journey as early as possible.