In this episode of Freakonomics podcast, they talk personal finance.
One guest, Harold Pollack, believes everything you need to know about personal finance should fit on an index card.
One rule he wrote on that index card is to save 20% of your income.
He said he received letters about that rule that went something like:
“Dear Professor Pollack: I’m a 28-year-old single mom and I work as a cashier. You have just told me to save 20 percent of my money. F*&k you!”
In the podcast, Pollack admitted 20% is ‘too hard’ for folks on the low-end of the income spectrum and his advice was more for the middle class.
My Great Grandma had similar advice as Pollack’s:
No matter how much money you make, save something, even it’s just $5 a month.
She understood the power of compound interest, like Professor Pollack.
Unlike Pollack, she understood the true power of her savings rule was about making a priority to have a consistent habit.
If you let circumstances keep you from saving $5 a month when you’re a 28-year-old single-mom cashier, you will let circumstances keep you from saving 20% when you are in a better position and you won’t ever make progress.
It’s not so much about the $5 a month or 20%, it’s about learning to make a priority and then making the tough choices to stick with it.
Doing that is even more powerful than compound interest. A consistent savings habit, no matter how small, can accumulate to substantial sums over years and decades, and put you in a position where the choices you make are much less dependent on the income you happen to be making at the moment.