Housing, transportation, food. And maybe taxes, depending on where you live.
These are the biggest expense categories for the majority of people, regardless of income. It’s not uncommon to hear about someone spending 50% of their take home pay on rent, or someone making $30,000 a year with a $300 a month car payment (plus insurance and gas).
You might already know this. You might have already heard about that thing called “The Latte Factor” – basically that if you skip the $5 a day Starbucks run and invest that money you’ll have hundreds of thousands of dollars saved for retirement.
So do you go for the big items like housing and food to boost your savings or do you cut out the little things (lovingly referred to as waste)?
What Does $30k Look Like?
First, we need to see what $30k looks like as far as money in your bank account every month.
I chose $30,000 a year because it’s around the per capital income in the US in 2015, and last year around 75% of 25 year olds made less. Income increases with age, but we can’t ignore the fact that in investing for the long term, the earliest contributions have the most room to grow.
Assuming a single person filing taxes and contributing 6% (around the national average savings rate), you take home $1,924 a month after taxes. (These numbers don’t include state income tax for simplicity).
How Much Does 15 Years Cost?
Next, we’ll look at how much money is needed, at this salary, to retire 15 years earlier.
Based on a Savings Rate of 6% and starting with a balance of $0, you can retire in 62 years. If you’re 22 years old, that puts your retirement age around your mid 80’s (assuming 5% returns).
In order to cut 15 years off that time, we need to increase our Savings Rate from 6% to 12%. Here’s how all this looks when it comes to take home pay:
|401k Contribution (%)||Take Home Pay (Monthly)||Difference In Take Home Pay (vs. 0%)||Years to Retirement|
To get anywhere close to a normal retirement age we’re going to have to find a way to spend almost $250-300 less each month. If breaking it down day by day works for you, then you have to cut out about $10 a day of spending.
$2000 can disappear pretty quickly in a month. Keeping student loan payments, housing, food, insurance, and transportation all under budget, especially if a big expense comes up, can be almost impossible.
These are not lost causes though.
You Can’t Cut What You Don’t Know
When making The Cut, you have to be honest with yourself and lay out every single thing you spend money on in a month. Tracking expenses is the first step. If you don’t know how much you spend, you’re effectively reducing the payoff of successfully increasing your income.
Now, I might have been misleading when I said this all only takes 15 minutes – figuring out how saving will affect your take home pay takes 15 minutes on it’s own. Tracking expenses is it’s own separate thing. If you put all your spending on a debit or credit card, it only takes a few minutes to go through your online statement. If you use cash, it’s probably more complicated. In both situations, you still need to write out what your bills are.
Tracking expenses involves knowing
- How much your monthly bills (rent, insurance, debt payments, phone, etc.) are
- What you spend any leftover money on.
The beauty in knowing what you spend is that every other aspect of financial planning becomes way easier. Running the numbers to figure out how you can retire 15 years earlier takes a couple minutes. Once you see the actual dollars required, you can visualize what coming up with those dollars looks like. Is it something that you can cut or expenses that you can reduce, or is it finding a way to earn extra money?
How To Do The Math
- Figure out what your current savings rate is. For most people, this will be what % they’re putting in their 401k.
- Plug your numbers into this calculator via Networthify – drag the slider from your current position to 15 years less, noting the change in required savings rate.
- Use a take home pay calculator – I prefer this one from smartasset.com – and plug in your income and current savings rate. Make a note of your monthly take home pay. Now input your new required savings rate, and figure the difference in take home pay.
- This difference is the gap you need to bridge.
The reality is that there are many people who might not be in a position to save for retirement or slash a couple hundred dollars out of their budget.
I think this might be in part because saving for retirement, especially with mounting financial obligations early in life, seems like an impossible task. We talk about it in percentages and final portfolio totals (remember, $1 million isn’t enough!/sarcasm) instead of daily and monthly habits.
You just don’t know until you do the math.
For me, the reality that I can reclaim 15 years of my life in exchange for a couple hundred bucks a month is something that I just can’t unsee.