Looking for a good New Year’s resolution? How about spending less on coffee and lunch? American consumers spend an average of $2,746 on lunch a year according to a recent survey by Visa. The average American, Wells Fargo estimates, also shells out $1,092 on coffee a year. Add that together and that lunch and coffee habit is costing nearly $4000 a year. Multiply that by several years and it adds up.
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Financial advisors say eating out is the biggest expense people can cut back on. They say consumers need to realize the money spent on lunch and buying lattes regularly are missed opportunities to save for retirement. “Spending is an enormous factor in terms of what your nest egg will look like. People are hard wired to spend. When they make more money, they tend to spend more. They don’t realize those costs end up creeping up on them,” says Ara Oghoorian, financial advisor at ACap Asset Management.
Whopping Nest Egg
He says if you can save more and spend less on lunch and coffee, it could pay off big. Let’s say you save $2400 a year or $200 a month beginning at age 25 and continue until retirement at 65. At an average 8% return, you could be looking at a nest egg well over $700,000!
Spend Less....Save More
If you start saving later, at age 35, you can still accumulate more than $300,000 (not inflation-adjusted.) Not a bad nest egg but much less than if you started saving earlier. Financial advisors say the earlier you start saving, the bigger the payout later and that is especially important as life expectancy increases. “People are living longer and you may need to have enough money to last you 30 years after you retire,” Oghoorian says.
He recommends people figure out a budget to reach their monthly savings goal and set that money aside automatically.
* Spend less and use cash—Oghoorian says give yourself cash each week for lunch and coffee based on the budget you created. Only use cash and avoid using credit or debit cards. He says it will force you to monitor your spending, stay on track and not overspend. You may also need to make coffee at home or pack a lunch instead of eating out. Oghoorian says think of that whopping nest egg and stay disciplined.
* Save…don’t spend work bonuses and raises—Set aside any holiday bonus or raise at work and put it towards savings. It is tempting to want to spend your raise and reward yourself but if you can continue to live on your original salary and invest anything beyond that, your nest egg will only grow.
* Avoid giving expensive gifts—Don’t spend money on pricey gifts for friends and family, Oghoorian says. It is difficult around the holidays but he cautions not to succumb to the pressure. He points out that you may have the income to buy expensive gifts now but you may not have that same income a few years from now. He says spending less on gifts and saving more is probably the smarter choice. Your family and friends will hopefully still love you regardless of any lavish gifts.
As for where to put your savings, Oghoorian recommends investing in a Roth IRA, where your money can grow tax-free or a backdoor IRA if you are unable to qualify for a Roth IRA.