A Tale of Two Savers
Today’s blog is inspired by one of the best Economics teachers (Linda Mikeska). She gave me a copy of this story and I have never forgotten it!
A Tale of Two Savers
The following case study is about two people who saved money. Both of them earned 10 percent interest on the money they saved. (Of course, in the real world, the interest or rate of return on savings can differ greatly from year to year and from one savings institution to another.)
Caroline Smith started saving when she was 22 years old, right out of college. Saving involves an opportunity cost—the next-best alternative given up. It wasn’t easy for Caroline to save $2,000 a year then, considering her car loan, the expenses of operating her car, and rent payments. But Caroline was determined to save because her grandmother always said it isn’t what you make, but what you save, that determines your wealth. So, reluctantly, Caroline gave up buying that new car and renting a really nice apartment, and she saved $2,000 a year.
After 12 years, she got tired of the sacrifice, yearning for a brand new red sports car and other luxuries. She didn’t touch the money she had already saved because she wanted to be sure she would have money for retirement, which she planned to do at the end of her 65th year. But she quit saving and hit the stores.
Jack Williams didn’t start saving until he was 34 years old. He also graduated from college at 22, but he had done without many things in college, and, once he found a job that gave him a decent income, he wanted to have some of those things he had done without. He bought a new car, a very nice wardrobe, and he took some wonderful trips. But spending his income involved an opportunity cost.
By the time he was 34, Jack was married; he had many responsibilities, and he decided he’d better start saving and planning for his financial future. He also had heard that it isn’t what you have earned, but what you have saved, that determines your wealth. He figured he had 25 to 30 productive years left in his career. So, with new determination, Jack saved $2,000 a year for the next 32 years until he retired at the end of his 65th year.
Which person do you believe had more savings at the end of his or her 65th year? Caroline or Jack? Remember- Caroline saved a total of $24,000 and Jack saved a total of $64,000. Tomorrow’s blog will reveal the answer!