In a previous article I believe I proved my mate Mike wrong – that there is no point saving money while at uni. Mike has since complained that my previous article was crap as nobody leaves money in a bank account for 30 years. This is very true.
So even though my fictional Sam started saving earlier than Mike, there might be a few ways that Mike is able to catch up in the finances game.
Reason 1: Investments that lose money
Sam makes a dud investment
If Sam invests his $5,000 in a company that collapses, he will never be able to compound the money for 30 years. He might not even be able to save for 26 years like Mike did (as it will take him longer to save another $5,000).
Buying a property that doesn’t grow in value
Say Sam managed to buy a property a few years earlier than Mike. However, if Sam’s property doesn’t grow in value for three years (say the area has nil growth for a few years), then Mike would be able to buy a similar property for the same price later on. However, given enough time, the properties Sam and Mike purchased should grow in value and in ten years Sam and Mike would likely be better off than their other mates who didn’t buy a property.
Reason 2: Inflation eats away at money
Inflation means things increase in price (which can be good if you have investments). So inflation decreases the value of what cash can buy (which is bad if you only hold cash).
The chocolates you bought for $1 when you were young now cost $3 or more.
The property your parents bought for $400,000 might now be worth $1 million.
Say your parent’s friends kept $400,000 in a bank account instead of buying a house. They would earn 5% interest a year which could compound. However, if inflation was at 3% per year then they would only be 2% ahead in terms of buying power. So their money might not have grown as much as your parent’s money, for buying their house.
Reason 3: Saving more later on
So even though Sam saved $5,000 while he was at uni, Mike can still surpass him if he is diligent and keeps up his saving. Although, beware that the later Mike starts saving – the less likely he will be to catch up with Sam’s savings.