If you look at the buildings around you they’re made up of many parts, most of them very small. The tallest skyscrapers are not built out of one large piece of concrete but are built in stages with lots of small amounts of concrete and steel. This simple fact is something that we need to keep in mind when considering many things in life, especially our personal finances.
Personal Finance covers a wide range of topics from debt to investment and for the average person it impacts their whole life. If you’re reading this and are in debt, did you accumulate this debt in one fell swoop? Chances are that you didn’t. Yes there maybe big ticket items that you purchased such as your car or your house but aside from those pretty much everything else is a collection of relatively small items. The $20 you put on your credit card here and there over time added up to the $1,000s that you owe on it now. Thinking small can put something like this into perspective and help you realize where your spending is exceeding your income and what you can do about it.
These small amounts all add up to very large numbers over time. If you were able to save $5 a week on groceries you’d be looking at $260 over the course of the year which could be used to pay down debt or make an investment. Saving $5 a week on something like groceries isn’t a challenge at all. If you’re one of the many people that routinely eat out for lunch then you’ll notice that by the time pay rolls around you’ve spent a lot of money on those lunches, I spend $35-40 a week on lunches for example. Using my example it adds up to over $2,000 a year. My relatively inexpensive $7-8/day lunch quickly adds up to a whopping $2K! I’ve been writing about this topic for over a year now and this example is still staggering for me.
Compound Interest and Saving
Looking at this from the point of view of saving money and compound interest if you’re able to save as little as $50 a month you’ve saved $600 over the year. Continue to do this over a few years and you’ll start noticing the compound interest kick in. At a fairly standard 4% interest you’re making $24 in the first year alone. Again if you continue adding and re-adding these small numbers over the course of a couple years this can add up to very large numbers. If you were to continue to save that $50 per month for 5 years with that 4% compounded annually you’d be looking at $3,379 and by the time year 10 rolled around you’re at $7,491 and you’ve made $129 in interest. Now that kind of money may not be enough to retire on but it’s definitely a perfect example of the power of small numbers.
Breaking Goals Down to manageable chunks
Another way that small numbers work to your advantage is in making the larger sums more manageable. You can take your goal of saving $5,000 which can be daunting for many people and break it down to setting aside a little over $400 a month which is much more reasonable than the initial sum. This applies to most goals that you come up with, breaking them down into manageable chunks means you’ll be better able to reach them.
You can see the power of small numbers all over the place, from business applications to learning languages. Simply keeping this in mind can help you get your spending under control and help you save a sizable chunk of money in the event of an emergency. Getting the large windfall of cash is a great thing but is far less likely than saving $5 a day over the course of a year (which translates to $1,825 over a year).