The Cost of Not Saving

It’s the end of the month and there isn’t enough money to buy all of the things that we seem to need, let alone the things we want. As we struggle to make ends meet, we think about the need for a savings program, but it seems there’s just not enough money to begin one. If we weigh the cost of waiting to start a savings plan, however, we might be more motivated to find the funds and begin. Let’s look at the benefits of maintaining both short-term savings and long-term investments. The actual dollar amounts noted are only for the purpose of illustrating the concepts.

Short-term savings: These savings are used for emergencies, buying or repairing vehicles, or replacing household furnishings and appliances. The cost to the consumer who doesn’t save regularly for such expenses can be enormous, as the following example illustrates.

The Taylors bought a car for $14,000, with a $500 down payment. They financed the balance, $13,500, for five years at an interest rate of 9.5 percent, requiring a monthly payment of $283.53. At the end of five years they had paid out $17,011.80 on the loan.

The Bakers, however, did not have a down payment. They decided to drive their old car five more years and put $275 in the bank every month earning 6 percent interest. At the end of five years they had deposited $16,500. But the Bakers’ money had also been earning interest, giving them a total of $19,282.69 in the bank. After paying cash for their car, they still had $5,282.69 in their savings account. Even after subtracting the cost of car repairs on their older vehicle, the Bakers had money left to invest.

Long-term savings: Mission and college costs and retirement funds are the main reasons people begin a long-term savings program. The key to making successful long-term investments is to start as early as possible. Here’s an example from the United States, though the principle applies everywhere:

Let’s say we have two young couples. The husbands are both 22 years old. Each couple decides to budget $1,200 a year for savings and investments. Couple number one opens an Individual Retirement Account, tax-deferred, at 8 percent interest annually and puts $1,200 a year into it each year for the next 10 years. Then their circumstances change, and they can no longer make deposits to their IRA.

Couple number two, on the other hand, decide to spend their money in the early years of their marriage on home furnishings and other things they feel they need to get started. Ten years later they decide to open an IRA account and deposit $1,200 per year at 8 percent interest, which they continue to do faithfully each year for the next 33 years, until they retire.

What is the result of each couple’s investment when they reach age 65? Couple number one has $220,358.80 in their IRA, of which only $12,000 was their own money. The rest was earned interest. Couple number two, however, had accumulated only $175,140.74 in their IRA, but had invested $39,600 of their own money. They could have acquired much more money had they begun their savings plan earlier than they did.

We have been taught by our Church leaders to use financial wisdom. Elder L. Tom Perry of the Quorum of the Twelve Apostles has counseled Church members to “live strictly within your income and save something for a rainy day. … As regularly as you pay your tithing set aside an amount needed for future family requirements. … A well-managed family does not pay interest—it earns it” (Ensign, Nov. 1995, 36). The cost of putting off the start of a regular savings program is one few of us can afford.—Terry L. Fowler, Vancouver, Washington

Sculpture by Davy Jones