Living from paycheck to paycheck takes its toll. When in debt and struggling to make ends meet, becoming complacent is all too easy. Small efforts to chip away at debt or tuck a few dollars in a savings account can seem futile. However, when it comes to saving, even small changes in your money habits will pay off. Here are a few reasons why a little really can go a long way.
1. Compound interest (the good kind).
If you can put $100 in an interest-bearing account earning 3%, you’ll have an extra $3.00 at the end of the year. It’s not much, but it’s money you didn’t have to work for. The more you can put in your savings account, the more literally free money you will earn.
2. Compound interest (the not-so-good kind).
When you are in debt, compound interest works against you. The larger the balance on your auto loan, mortgage, student loan, or credit card, the more interest you are paying each month. Having a large balance means that when you make your minimum payment, most, or even all, of that payment is going to pay the interest and not the principle.
The good news is that making extra payments on your loans can have a significant effect. When you pay more than the minimum payment, all of that “extra” money goes toward the principle. Having a smaller principle means paying less interest in each payment. Even making one extra payment has a “ripple effect”, making each of your minimum payments count more toward paying off your balance and less toward lining bankers’ pockets.
A common rule of thumb states that if you can make even one extra mortgage payment over the course of each year, you will shorten the repayment period of your 30 year loan by five years. Over the lifetime of the loan, you can save yourself thousands just by paying a few extra dollars each month.
3. Breaking out of the debt cycle.
Even a small emergency fund can help you break out of the cycle of debt. Most severe credit card situations are brought on by genuine hardship. People borrow money because they have sudden, unexpected bills or because they have a loss of income. Once the money is borrowed, it quickly begins accruing interest. Making payments doesn’t help as much as it should, because most of the payment is interest.
By maintaining an emergency fund, you can minimize the amount of money you have to borrow in a crisis. When you “borrow” money from yourself, you can easily put it back without paying interest. Spending money you have is always less damaging in the long run than spending money you don’t have.
4. Saving is habit forming.
Forgoing that one dollar bottle of pop or that three dollar cup of coffee may seem like a trivial decision, but when you start to make frugality a habit, the savings will begin to add up in a big way. Once that starts to happen, saving becomes a sort of game where the balance in your bank account is a score. You will find yourself wanting to stretch every dollar to the limit, and you’ll wonder why you ever settled for the paycheck-to-paycheck life.