The majority of people will admit they do not think they are saving enough for retirement. Worse yet, the majority of retirees wish they had saved more. I have had the unfortunate privilege of working with hundreds of people who seemed to forget they cannot rely on their wages forever. Even if you plan to do so, your body and mind eventually give out. So what can we do to flip the script?
Money is a tool, not a toy. Below I hope to explore a few methods anyone can apply to their lives to ensure they are taking care of their future selves financially without doing harm to their present selves. This article will be focusing more on methods of saving as opposed to an in-depth guide to retirement.
From Debt to Net Zero
Early in our careers, my wife and I had a significant amount of debt putting our net worth deep into the negatives. As with most younger people, this is the unfortunate reality. The costs of education, housing, and healthcare put us in difficult situations, where one wrong move or accident can cause everything to collapse.
Creditors love to prey on the young as there are many more years of life to suck away all of their money. How do you know if you have what would be considered predatory debt? Anything over 5% APR constitutes an emergency in my book.
If you have any outstanding credit card debt, look into a personal loan. As a simple example, shifting a $10,000 balance from 20% APR (yuck) to even 10% (better but still yuck) will save you $1,000 a year. Though you need to be honest with yourself; if you pay off your credit cards, will you just go and rack up the debt again? If you know you likely will, cut up the cards. If that sounds horrifying to you, another interesting trick is to freeze your cards in a block of ice. Any time you are tempted to spend money you don’t have, you’ll have to pull the block of ice out of the freezer and contemplate if it is worth it.
Are you making payments on a car note? Check the interest rate and see if refinancing is possible. To put it bluntly, I know too many people who have been taken advantage of by car salesmen with no morals. There is no vehicle in the world worth a loan over 5% APR, much less the 10-20% I have seen far too many times. If you are stuck with one, either refinance or try to sell it if the balance is low enough. If you cannot afford a car without getting one of these loans, then you cannot afford the car. Go get a cheap vehicle and pay yourself the difference.
The same goes for “rent to own” deals. If you have ever read the fine print, these are horrible for everyone but the seller. My favorite live example is buying a couch for $130 a month for 24 months. You can buy the couch for either $1,830 up front or $3,120 over time. That works out to basically 35% interest a year. That couch had better do the dishes and my taxes for what I would pay for it.
From Net Zero to Wealth
One trick I have used in order to save more is to take any raises or bonuses I get and put them towards my savings. By diverting any additional money I would be seeing hit my bank account and potentially spending it, I keep my spending constant as the same amount is coming in as before. Lifestyle inflation will eat anything you let it. If you do not want to take it that far, split it in half; keep half your raise or bonus and put the other half towards your savings.
If you have made good vehicle buying decisions, then you hopefully have a fairly cheap vehicle paid for with cash. Instead of just not making a car payment since you have no car note, set aside an appropriate monthly payment to a separate bank account. Any time you have major repairs or need a new vehicle, you can dip into this savings account. When it accumulates too much cash, and it will, you can take the excess portion and put it towards retirement. Basically you are paying yourself a car note and taking the profits all for yourself. Neat.
If you are fortunate enough to own your home outright, you can follow the same principle with mortgage payments. Even if you do not own your home, it is still a good idea as an untimely repair bill will do quite some damage. The general rule of thumb is to set aside 1% of your home’s purchase price per month for repairs and expenses. I aim for approximately enough to replace the roof entirely in a separate account I lovingly call the “house fund.” If the balance climbs too much higher than that, it gets shifted to either general emergency fund or to investments.
Once you are done paying off any loan you might have, keep making the payments towards either another loan or if you have all your debt paid off (congratulations), then make the payments towards a savings account. Check to see if the debt snowball or avalanche method will work better for you.
Increase Income
For many people, it is actually easier to increase income than decrease spending. That is not to say that it is easy to increase income, more that people have major issues with lowering their spending to any degree. Lifestyle inflation is a cruel mistress who sneaks up on you when you are not looking.
So how can we increase income? Of course the most obvious way is to work more. If you are working less than the traditional 40 hours a week then you have room to work. Even if you already work 40 hours, you could work more if you wanted to. Most people do.
Now, if you do not love what you do and would rather not spend most of your time working, you need to work more efficient. There are two broad categories in the labor market: you are either paid for your time or for your merit. If you are only paid for your time, then you will likely not earn more by being more efficient. This is mostly lower skill (and sometimes effort) jobs where you are not expected to do much more than show up and follow a routine. You need to find a job where performance matters, not presence. For instance, any job that pays a commission or profit sharing. You will certainly need to try harder than a job that only expects you to show up, but that is only fair. Real estate agents are the typical example for this.
You can also develop a skill in your free time or go back to school. The key here is ensuring that the skill or education has realistic financial benefits. I would never recommend anyone to go into major debt or waste years of their lives to learn Egyptology (unless of course you have a realistic career doing it. If that is the case then more power to you!). Compare the total cost of the degree or any courses you decide to take and the increase in potential career earnings to make sure it makes sense for you to pursue.
Decrease Spending
Decreasing your spending actually has a two sided effect. For one, by reducing your spending you have more money to stash away for your future goals. For two, you need to save less for them. Consider the fact that the average retirement assets needs to equal at least twenty five times your annual spending to support you. What happens when your annual spending goes down? Your retirement assets goal goes down.
For every $1,000 a month you intend to spend in retirement, you need to have $300,000 in retirement assets as a rough guide. More is safer of course, but this is a lower bounds minimum for a moderately safe retirement.
How about an example? Sally currently earns $36,000 a year after tax, spends $2,000 a month, and has decided to start saving $500 a month for retirement. Using her spending in the above formula, she will need at least $600,000 in retirement assets. It will take her approximately 30 years saving $500 a month to retire with this spending goal.
Let us consider she manages to slash her budget by a respectable $500 a month. If she puts this money towards retirement, she will have an additional $600,000 in retirement, doubling her original monthly spending allowance. In reality she only needs $450,000 with her new spending rate. Of course if you are like me and would rather retire early, she could retire in a little over 18 years.
Your Financial Life in Progress
Making even small improvements today can lead to big results tomorrow. You do not have to be a perfectly frugal or super high income individual to retire on time or even early. Just keep at it and you will shock yourself. Each day is a new day, so let’s make the most of it.
