It’s no secret that many people struggle with their finances. Just a few years ago, the Federal Reserve found that about 37% of American adults would not be able to cover an unexpected $400 expense without borrowing or selling something. Some weren’t sure they could even pay that amount.
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The problem with this is that unexpected bills are constantly popping up. Whether it’s medical bills or a flat tire, the last thing you need is to go into debt just to pay the bill. Having even a small amount of savings or an emergency fund can help you avoid debt. And once you’ve built up a sizable emergency fund, you won’t have to worry so much about the little things.
In a recent online interview, Scott Galloway, a professor at New York University, talked about the most common mistakes he sees young people – those in their twenties – making, and how they often don’t realize how much money they’re spending or the consequences of using credit to finance their purchases.
Fortunately, Galloway has proposed a solution: start saving early and do so regularly over the long term.
Earning passive income doesn’t have to be difficult. You can start this week.
Set aside $100 per month
In this interview, Galloway gave young people an important piece of advice: get into the habit of saving money regularly. Even if you start small, your future self will thank you later.
“If you get into the habit of saving just $100 a month, you’ll instantly be in the 10% most financially responsible people in America,” Galloway said. “Most people can’t do that.”
If you don’t think you’re better off financially with just $100 a month, you might want to look at it another way. Let’s say you start saving that amount every month from age 25 to 65. Without taking interest into account, you’ll have $48,000 in 40 years.
But it would be smarter to use an account that pays interest – ideally compound interest – so your money grows faster during that time. Here are some examples of how much money you could have after 40 years of consistent saving based on the average annual return of the account you use.
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For example, let’s say you use a high-yield savings account (HYSA) with 4% APY (annual percentage rate). If the interest rate is compounded once a year, you would have about $114,030 by the time you turn 65.
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Suppose you instead invest the money in a stock portfolio with an average annual return of 8%. At age 65, you would have about $310,867. For each additional year you save, you could earn about $30,000 more annually.
If you increase your savings at any point in your life, such as when you earn more money or have fewer expenses, you can increase your overall savings – and returns – exponentially.
If that doesn’t seem like a lot, think of it this way: The Federal Reserve found that the average retirement savings of an older American (ages 65 to 74) will be just $200,000 in 2022. Assuming you don’t change your savings but use an investment portfolio with an average annual return of 8%, you’re already at an advantage.
But what if you increased your savings amount? Here’s an example of what that might look like:
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You save $100 per month for 10 years (starting at age 25) in an investment portfolio with an average return of 8%. By the time you’re 35, you’ll have $17,383.
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Now let’s assume you can save $200 each month in the same account for the next 30 years (until you’re 65). You’ll have an estimated $447,000.
Learn more: Average monthly spending by age: Which group spends the most?
Tips for getting started
Making saving a habit can be difficult, but it gets easier over time. Here are a few quick tips to get you started.
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Set up automatic savings so you never miss a month.
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Keep your overall expenses low so you can comfortably save $100 each month.
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Take advantage of high-yield accounts. These can include tax-advantaged retirement accounts such as IRAs or 401(k)s.
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Don’t leave your money in a regular savings account (unless you need quick access to a small amount in an emergency).
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Increase your savings contributions as you earn more money.
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Avoid financing purchases with credit cards or loans. Only buy what you can afford so you don’t get hit with high interest rates. For things like a car or a house, try to make a larger down payment and shop around for the lowest interest rates possible.
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This article originally appeared on GOBankingRates.com: According to financial expert Scott Galloway, you could be among the 10% richest Americans financially with just one move.