When I get out of School or Residency:
We like to imagine our future selves as a better version of what we are today. But the best indicator of future behavior? Current behavior.
There’s a great philosopher who once said “mo’ money, mo’ problems” – it’s true. If you can’t figure out how to manage $50,000 you’re going to have more trouble figuring out how to manage $500,000.
Maxwell Matz was a Plastic Surgeon in the 1950s. He observed after performing a nose job it would take around 21 days for that person to get used to their new face. He went on to do more research about habit formation and found that it took a minimum of 21 days of doing something before it became a habit.1
In another study they found it takes anywhere from 18 days to 254 days for habits to become automatic.1
Even if you’re only saving what you may think is very little per month, that’s not what’s important. It’s the habit formation that is occurring within you.
Small numbers add up to big numbers over time. I wish someone had told me at 16 years old, when I started working to invest $100/month from my paycheck and keep doing just that until I was 66.
If I invested that $100/mo into an S&P 500 fund, (a reflection of the US stock market as a whole) which has averaged a rate of return of roughly 10% per year.2 from age 16 to 66 it would be worth $1.7MILLION at 66, even though I only saved $60,000 of my own money! ***
If you start saving money now on a smaller income, you will likely keep that habit with a larger income.
If you’re not sure where to start, read our article on automating your finances.
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1 James Clear: How Long Does it Actually Take to Form a New Habit?, https://jamesclear.com/new-habit, 2/8/2019
2 Investopedia: What is the average annual return for the S&P 500? J.B. MAVERICK, https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp, Updated Jan 18, 2019
*** This hypothetical example is for illustrative purposes only. Not based on any particular investment. Assumes 10% annual return. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.