Most people think of their retirement savings as what’s left over after they cover their living expenses. Unfortunately, it’s far too common, especially here in Los Angeles, for people to live at or above their means. Debt, such as credit cards, auto loans, and home equity lines of credit allow us to pull forward future spending. Rather than having to save to make a purchase, people simply put it on a credit card and pay it off in the future. Unfortunately, this type of behavior can really cramp your financial future.
First, you have to pay interest on the amount that you borrowed, and some credit card interest rates can be as high as 20%. So, if you decided to put $1,000 on your credit card and you fail to pay it off, you’ll owe $1017 the next month, then $1033, then $1050, and so on. This is called compound interest. But instead of working for you, building your wealth over time, this version of compounding is eating away at your financial well-being.
Simply put, don’t carry a balance on your credit card that you can’t pay-off in the same month. Instead, forego the spending until you can save enough to pay for that shiny new widget you can’t live without. Trust me, it’ll still be there.
Instead of living at or beyond your means, the trick to saving money is to set your “means” lower than they actually are. Let’s say you bring home $5,000 per month after taxes. Instead of living off the full $5,000, set a budget and aim to live off of $4,500. That might sound painful, but believe me, it’s possible. Consider setting up a direct deposit to a separate account away from where you handle your day-to-day expenses, or increase your contribution to your company 401K plan. That way, you don’t see the money in your account and won’t feel tempted to spend it.
Here’s why it’s so important. Instead of compounding returns working against you on your credit card, you can begin to put the math to work in your favor.
If you’re diligent and save $500 per month, you will have saved $6,000 at the end of the first year, and 12,000 at the end of the second, and so on. Simple and boring, right? But here’s where things start to get interesting. Let’s assume that you invest your savings diligently and earn a 7% annual return. How much will you have down the road? See the table below:
Over 30 years, you can amass more than $600,000 in savings. The trick is, not to look at is as $600,000 in 30 years, but to see it as $500 in the next 30 days. You can’t complete a marathon until you at least take the first stride. You have to look at it with the same perspective, it’s a marathon, not a sprint.
Here are a couple easy ways to get you on your way to your savings goals.
Our Devices – We can’t live without them, right? The good news is, they can be a source for savings. Recently, I called my service provider to see what kind of deal they’d offer me to bundle the six devices, cable and internet we have in the house. To my surprise, the savings was worth $250 per month. Yes, I had to sign a contract for 2-years, but that ensures $250 in savings for the next 24 months. Assuming I save nothing else, that $250 over 24 months is worth $45,674 in 30 years. If I continue to save the $250 for the full 30 years it’s worth $303,219. Yes, $303,219 from bundling the devices in our home.
Coffee – If you’re a Starbucks faithful, this might be painful. It was for me too, at first. I used to go to Starbucks everyday on my way to work. The Venti Mocha was my drink of choice – $4.95 every day, sometime twice per day. That five dollars per day adds up to about $100 per month, or $1200 over the course of the year. Continue that for 30 years, and it’s worth $121,288. If your co-worker dared you to drink the office coffee for $120K, are you going to say no? Remember, it’s a marathon, not a sprint.
The Grocery Store – As a starving college student, you learn to stretch your dollars at the grocery store. At our local grocery store, there’s always a sale. You get the flier each week that clutters your mailbox and quickly finds its way into the trash can. However, those same items are noticeably marked in the isles with yellow tags. Implement this simple rule, if it doesn’t have a yellow tag, you don’t buy it. Instead of buying the necessary ingredients to cook what you want, you design your meals around what’s on sale at the store. Trust me, you won’t go hungry, and you can easily save $5 per day, if not more. Five dollars’ times 30 days is another $150 per month, or $181,931 over 30 years. Remember, it’s a marathon, not a sprint.
Start looking at things in terms of their future value, not their current value. If you do, you’ll think twice about what you spend your money on.
Below is a table that shows how much $500 per month in retirement savings will grow to depending on rate of return and time invested.
What if you could save $1,000 per month toward your retirement savings?