Take a moment and think about where all your money is going each month. Do you have an idea of the dollar amount you spend on necessities versus nonnecessities? If not, you're not alone -- and it's potentially hurting your chances of enjoying a comfortable retirement.
The average baby boomer spends around $683 per month on nonessential expenses, according to a survey from TD Ameritrade, and 15% of boomers spend upward of $1,000 per month. If you can afford it, there's nothing wrong with these types of costs. However, 42% of boomers said their discretionary spending is negatively affecting their ability to save for retirement.
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With so many older Americans nearing retirement age with a next-to-empty retirement fund, the problem isn't necessarily that they don't have enough money to save -- it's that they're not prioritizing saving. And while spending money on dining out, entertainment, and hobbies may provide short-term happiness, those feelings will quickly fade once you retire and discover you don't have enough to last more than a couple years -- or worse, when you realize you can't afford to retire at all.
Fortunately, you don't need to completely eliminate discretionary spending to save more for retirement.
Budgeting: The key to supercharging your savings
Before you can start saving more, you first need to figure out exactly how much you're spending each month -- and where that money is going. To do that, you need a budget.
Creating a budget may not be the most exciting way to spend an evening, but it is crucial if you want to get your finances in order. And luckily, once you establish a budget, maintaining it is quick and painless.
First, go through your last few months of bank and credit card statements and divide your expenses into three categories: truly necessary, important, and discretionary. Truly necessary costs are the ones that will have serious consequences if you don't pay them, like your mortgage or car payment. These costs are also typically fixed, meaning they won't vary month to month.
Expenses in the important category are necessary, but you may be able to cut back in some areas to save money. These costs can include things like groceries, gas, and cable or internet. While you likely need those things every month, you may be able to lower your bills by, for example, being thrifty at the grocery store, carpooling to work a couple times a week, or switching to a different cable company to lower your bill. So while you don't have to eliminate these expenses, you should be taking a closer look at them to see if you can shave off a few dollars here and there.
The third category, discretionary, is where you have the most wiggle room. These are essentially the "nice to have" expenses, like spending on dining out, hobbies, and entertainment. You don't need to slash these costs completely (after all, you still want to be able to enjoy your life and treat yourself sometimes), but you should try to cut back where you can. For example, if you normally eat out three times a week, try cutting back to just once a week. If you spend, say, $30 each time you go out, that change alone amounts to saving an extra $240 per month. If you make small cuts in several areas of this category of expenses, you could be saving hundreds of dollars every month.
Also, don't forget about occasional expenses. For example, if you have a membership fee that's $120 per year, include it in your budget at $10 per month. During the months you don't have to pay, stick it in a savings account so it's there when the bill comes around. Similarly, if you normally take a big family vacation once a year, set a max budget for the trip and save a little toward it each month. (Bonus points if you put this money in a high-yield savings account to earn more in interest.)
The snowball effect of compound interest
All these small, individual changes may not seem like much, but combined, they can make a big difference. This is partly due to the power of compound interest, which is essentially when you earn interest on your interest. So saving even a small amount can snowball over time.
To illustrate, let's look at a hypothetical example. Say you've combed through your budget and have started saving $400 per month by cutting back on nonessential expenses. You put that in your retirement fund, earning a 7% annual rate of return. After 20 years, you'd have nearly $200,000 stashed away. In 30 years, you'd have more than $450,000 saved. This is also assuming you continue to save $400 per month. If you get a raise or find a new job with a higher salary and start saving more, your total savings can skyrocket.
You don't have to give up all the things you love doing, like trying new restaurants and going to the movies. But retirement is worth a few sacrifices. And the earlier you start saving, the more you'll be able to enjoy retirement and continue doing the things you love well into your golden years.
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