Saving is not sexy, until you find out you can retire early!
The relationship between the years of our life and how much money we can save each year is critical, yet seldom considered. Your savings rate, not your income, has the biggest impact on early retirement (or to put it better, the flexibility you enjoy in your life relating to what type of work you do or to the time you have to spend with family). One may say “savings is much less sexy than a fancy car”. Well consider this, if you can save 25 times your annual spend, you can strongly consider retirement at any age.* You can do this at the age of 25, 35 or 85. It is all up to you. Now is quitting your job at 38 and pursuing your passion in fill-in-the-blank, sexy? I think so and I did it at 43!
Now you may think that 25 times my annual spending is unreachable. My response would be to not sell yourself short. Seemingly small retractions of your spending can make exponential effects on your savings, thus how soon you can retire.
Let’s consider the numbers: The average savings rate in 2019 was 7.6%, according to the U.S. Bureau of Economic Analysis, while in 2019 the average US salary was $51,916. This means that on average families are saving $4,101 per year. At this rate it would take the average person 243 years to save $1M. But check this out! In the year 2020, when people were stuck inside due to COVID-19 and were forced to save their money, the savings rate for Americans soared to 33.7%. WOW! This means families really could save more! People were saving $17,485 per year, up from $4K. At this savings rate, if you consider average rate of return and inflation, it would only take 28 years to reach $1M.
Reducing your spending and increasing your savings rate are hard, and results may not come overnight. Like working out at a gym, it may take a few months to see the impact. For the biggest, quickest impact on your budget, I suggest two areas to focus on first: Discretionary and food spend. (read more about how I set up my budget on my blog post “Let Go of Overspending”)
For a quick recap, Discretionary spend is anything you spend your money on that is not a Core expense. What is a Core expense? Core expenses are expenses that keep you alive and functioning: food, housing, medical, childcare, and utilities are the big areas. What is left after Core spending is Discretionary. It is in Discretionary spend where you can make a quick impact on your savings rate.
Let's say, you make 7K per month (roughly 95K per year) and your core expenses are $4,500 per month. The potential savings rate is 40%. But one cannot have a life without a little fun. The choices you make on entertainment directly effects savings. If you spend $2,000 per month on fun, your savings rate drops to right above 10%. The difference between a 10% savings rate and 20% savings rate is 15 years extra 9 to 5 work. A great site to find your savings rate is on WalletBurst.
Getting the budget set and spending in order is really where a personal finance coach can come in handy and pay for itself over a matter of months. It is not easy to get from 10% savings rate to 20%. I have been at around 65% to 80% over the last 10 years.
Now, I mentioned that there were two areas that had a major impact on one's savings rate. I discussed Discretionary. The second way to quickly impact savings is on food (groceries and restaurants).
Prior to COVID, I thought I was doing well with a grocery budget of $1,400 per month and a restaurant budget of $300. However, we would always drift North of that number by stopping by Trader Joe’s “just get one thing”. That one thing always turned into over $30 of spend, thus wreaking havoc on our grocery budget.
COVID forced us to only go to the grocery store once per week in fear of death (yeap, that will reduce spend)! I had to get really good at repurposing menu items to reduce food waste. I also learned that many things I bought already prepared, salad dressings, hummus, stir-fry sauce to name a few, were actually very easy to make, better than store bought, and much less expensive. My family of 4 is now averaging $950 per month with a $250 per month budget allocated to restaurants (including coffee). This has reduced our spending by $500 per month or $6,000 per year! And with all of our savings, we are not eating bad. We eat seafood, salads and many more healthy yummy things.
In closing let the take-away from this article be to focus on increasing your savings rate to at least 20%. The more you save, and the longer that money is invested, the earlier you can retire and do with your time what you want.
Do you need motivation or accountability? We can help! A personal finance coach is similar to a personal trainer. We support your progress towards your savings goals with proven methods, encouragement, and kind accountability.
Let’s get started!
Maggie
In this article and most of my posts I will use $1,000,000 USD as the goal post for the amount you need to have in savings to start thinking of retirement. When you have $1M invested the rule of thumb is that you can expect a 4% return each year, providing you $40,000 per year in passive income. This number varies based on your lifestyle choices which influence your spending.
TIPS: Do you need help with meal planning and grocery shopping? Try BudgetBytes.com as a way to plan your weekly meals and grocery list. The plans are $12 but they can be reused many times and can save you tons of time and money. CLICK HERE
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Photo by DESIGNECOLOGIST on Unsplash
