“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”

— Charles Dickens, David Copperfield

Advice for Younger Savers

If you’re around retirement age, this column may not be of direct benefit to you. But if you’re years away from retirement, or you have children or grandchildren that are just entering the workforce, I’m about to provide timeless financial advice.

In fact, you’re about to read the most important lesson about money I’ve ever learned.

If I can adapt the quote from David Copperfield above into modern terms, I would put it like this. Over the course of a lifetime, the person who spends 1% less than they earn can accumulate wealth. The person who spends 1% more than they earn will help the banks and credit card companies accumulate wealth.

Of course, for the person who spends less than they earn, how quickly they accumulate wealth will depend on how much they earn, as well as how they invest their savings.

But for the person who spends more than they earn, the amount they earn doesn’t matter. They will slide into an increasingly deep hole in debt.

The Power of a 2% Shift

Consider an example to illustrate. Two people earn $50,000 a year. One saves 1% ($500 each year) and invests it in an index fund that achieves a 9.8% annual return, the average long-term total return of the S&P 500.

Over the course of 40 years at that return, assuming all dividends are reinvested back into the fund, that total investment of $20,000 would grow to be more than $230,000.

If on the other hand, the second person just spends 1% more than they earn each year—accumulating an additional $500 in debt year after year—the situation is remarkably different.

If that debt is mostly credit card debt, the average interest rate is probably much higher than the return achieved by the S&P 500, but let’s assume they are the same. In this case, the $20,000 of debt accumulated could end up accruing interest of well over $200,000 that is paid to the lender.

So, two people with identical incomes and a mere 2% difference in their spending habits could end up with a more than $400,000 difference in cash flow over the course of 40 years.

Small Changes, Big Money

The average household with credit card debt owes about $20,000, and the average annual percentage rate on credit cards has soared to 27.8%. That means that for a household with average debt on an average credit card, interest on these cards is accruing at a rate of $5,560 a year.

This sort of crushing debt is a significant barrier to wealth-building. My #1 rule for investing is always to get rid of that high-interest debt.

What would be the impact of investing that $5,560 a year in the previously referenced S&P 500 index fund? In 40 years, that money could grow to about $2.5 million. That is the lost opportunity from long-term credit card debt.

If your objective is to achieve financial security, you will probably want to save a bit more than 1%. Let’s illustrate with someone who earns just $35,000 a year—less than half the median household income of $74,580 reported by the U.S. Census Bureau for 2022.

It will undoubtedly be more challenging, and impossible in some areas, but let’s say a person earns $35,000 a year and manages to save and invest 10%. That investment could grow over the course of 40 years to $1.2 million in our hypothetical S&P 500 index fund.

I speak from experience. It wasn’t easy, but I saved 10% when I earned even less than this. It’s certainly easier if you can find a higher-paying job, but this is a get rich slowly plan that would have been achievable by most Americans over the past 40 years.

Yes, it requires dedication and discipline. But I am living proof that such dedication and discipline are possible.

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