Why we should save and invest from an early age

In many of our articles and podcasts on the subject, we talk about the most important rules and principles in the field of personal finance, and specifically saving and investing. In order to be useful to as many of you as possible, the rules we talk about are usually universal in nature, that is, they apply equally to all people, in all circumstances. However, there is one pattern that we have mentioned, but have not yet examined in depth. And it is that it is very important that saving and investing are processes that we undertake from the earliest possible age. A young person who started saving at 25 has a huge advantage over a person who started doing it at 45. This advantage is time. And in saving and investing, time is everything.

The earlier you start, the easier the saving process will be.

The earlier you start saving, the smaller part of your income you will have to save to accumulate enough savings that are capable of providing you with a good standard of living as a retiree. This is basic math. For example, with a fixed income of 12,000 BGN per year, if starting at age 25 you save 3,000 BGN of it per year (which is equal to 25% of your total income) by the time you retire at age 65 you will have saved a total of 120,000 BGN. However, if you start saving at age 35, then by the time you retire you will only be able to save 90,000 with the same level of savings each year. If you want to save the same amount, you will have to increase your annual savings to 4,000 BGN, which is about 33% more.

Simply put – if you want to save less, save earlier! This may sound paradoxical, but it is not. When you start saving at an earlier age, the total amount of your savings is greater, but the portion of your annual income that you have to set aside each year is smaller. This is where the secret lies. It is much easier to save a little over a long period of time than a lot over a short period of time. It is also more productive in the long run.

Saving early helps build serious wealth

If you start saving at a young age, it is much easier to accumulate enough wealth to ensure a relatively comfortable life in old age. And this does not even require a particularly large income. By cumulatively accumulating savings year after year and constantly reinvesting them, even the average Bulgarian can accumulate quite serious wealth over the course of their entire working life. This is the magic of compound interest.

Let us illustrate this with a very simple example. The working life of a Bulgarian in most cases is somewhere around 40-45 years. This is the period from the completion of higher education, somewhere around 22-25 years, to the mandatory retirement age – 64 years (for men at the moment). This is a fairly long period of time during which, through even relatively small savings, you can accumulate significant wealth.

For example, with a monthly income of 1200 BGN, if you save 25% of it (300 BGN) and invest it at the end of each year, with an average annual real return of 5% for 40 years of work experience, you will accumulate 435,000 BGN! If we assume that you will live as a pensioner for about 25 years (up to 90 years, which is above the average life expectancy at present), you will have 17,400 BGN per year, or 1450 BGN per month. Note that this is an income that is even higher than 1200 BGN per month! That is, with enough savings invested adequately, you can not only maintain your standard of living, but even improve it!

Of course, the conditions for achieving such returns are consistency in saving year after year and constant reinvestment of those savings, without withdrawing part of them to satisfy your short-term consumer needs. In a word – financial discipline. Which brings us to the third very important reason why it is a good idea to save from an early age...

Saving teaches financial discipline

If you start saving from an early age, you will learn to be much more careful with your finances. You simply will not have a choice. The moment you take the responsibility of securing your life in old age into your own hands, if you are really serious, you will have to learn financial discipline. And this will have a very positive effect on your financial habits - it will teach you how to optimize your expenses and in general you will approach all financial matters more carefully. This way you will build habits that will be useful to you throughout your life, not only personally, but also professionally.

Many people live with the illusion that they don't have enough money to afford savings because they have too many expenses to cover. The reality in most cases is that too much of these expenses are actually unnecessary, but you just don't realize it. Either you spend money on things you don't need at all, or you spend too much on things you do need. If you start saving regularly, every month, you will have to strictly monitor and optimize your expenses. Once you write them down on paper, you will be surprised at how much of them actually seem (and in most cases are) completely unnecessary.

Financial discipline will improve your standard of living

Once you optimize your spending, you may find that you can actually afford necessities that you previously thought you couldn't afford, but in fact it was only because you were wasting too much of your money on unimportant things. Cutting unnecessary expenses is a good idea not only because it will allow you to save more, but also in itself because it brings with it many positives for other aspects of your life. It will teach you to be more responsible and organized, both personally and professionally, which will certainly have a positive effect on the quality of your life.

So, don't hesitate at all - start securing your retirement from the earliest possible age. You don't have to save a lot. It is obvious that most people cannot afford to accumulate serious savings from the very beginning of their working life. But even if you save a little, as long as you start early, as we have seen, in the long run this will significantly facilitate the achievement of the coveted financial independence that each of us dreams of.

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