You think you need to spend everything you earn

Image source: Mark Gunn

Far too many people retire with little or no money to their name. The simplest reason is that they spent more than they could afford to throughout their lives and failed to save and invest for their retirement.

Approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account. These are frightening statistics. Why does this happen? Some people will point to the little things as being the culprit; people buying frivolous little daily luxuries, like their daily Starbucks addiction. While these are factors — the little things do add up — they are likely not the biggest reason why people have not saved enough money for their future.

The largest contributors to the savings shortfall are related to the largest expense that we have: housing, transportation, and food. We are spending 62% — almost two-thirds — of our income on these three categories.

The biggest impact that you can make is one that’s likely not going to be popular: spend less. You might not be able to spend less on transportation — especially if the bulk of that expense for you is via mass transit — as those expenses are somewhat out of your control. You do have much more control over how much you are spending on food and housing.

Food glorious food

Food is an easy one; well it’s easy in principal. If you go to the supermarket and prepare your food at home, you can likely save a lot of money compared to eating most of your meats at restaurants. Again, in principal this is easy. Even knows that restaurant food is typically more expensive than preparing food yourself, but dining out provides convenience and usually socializing.

Image source: Bloomberg

Back in 2015, the amount that we spend at restaurants surpassed the amount that we spend at the supermarket. (No wonder it’s been so empty at my local supermarket lately.) Is everyone dining out? It seems as though the Millennials dine out more frequently than those older adults.

Older Americans have been expressing less of a willingness to spend on dining out while funneling more cash toward those grocery trips. The share of 51- to 69-year-olds who said they are spending more on groceries compared with a year earlier outstripped those who said they are spending less by 45 percentage points, according to a Gallup survey.

If you want to make a serious dent in your spending, you should start with your food purchasing habits. I’m not going to suggest that you never dine out with your friends, just be mindful of the way you are spending money. Perhaps you could eat at home more nights than you dine out. Perhaps you could take your leftovers home and have them for dinner the next night. (I have a friend who turns one meal out into three meals in total.)

Home sweet home

Yes, your home is your largest expense. If you are older, hopefully you own your own home. Whether you own your own home or you are renting, here’s an idea which might save you a lot of money. Move to a less expensive home.

Yes, a less expensive home might increase your travel time to work and it might mean increasing your transportation expense, but it could decrease your largest monthly expense. Any significant decrease in your housing expense could have a larger impact on your savings than all other expenditures.

Let’s assume you live on Long Island, New York. We’ll assume you live in Rockville Center. The average home value there is $662,600. If you sold that home and purchased a home in Farmingdale, NY, you might save yourself more than $250,000. Farmingdale is just 15 miles further east, but the average home value there is $394,500.

The same theory holds true for renters as well; the further you are from the city center, the less you will likely have to pay in rent. The average rent in San Francisco is pushing $4,000. You could rent a two-bedroom apartment in Walnut Creek, CA — just a 37 minute ride away on BART — for well under $3,000.

I am not suggesting that everyone should downsize their housing situation, but if you are having a tough time squirreling money away for your future, it makes more sense to lower your expenses rather than just saying that you have to spend everything you earn just to make ends meet. There are choices that we can make. Some are more painful than others. Some affect the quality of life.

You need to be able to save money for your future. If you spend everything you have today, you will have a very difficult time later in life. In 2017, the average person will only receive $1,360 per month in Social Security income, or $16,320 per year. Could you live on that? Few, if any of us can.

You have options

By saving and investing a reasonable portion of your salary every month, you can have money when you retire. Think about it. If you were able to invest $12,000 a year, assuming an 8% average annual return in your investment, after 20 years, you would have almost $600,000. After 30 years, you could have $1.5 million!

Before you suggest that you can’t save $12,000, think about the rent differential in the Bay Area. A San Franciscan could save well over $1,000 a month in rent simply by moving about a half-hour east. By spending far less on rent, you could easily take that $1,000 and invest it in your future rather than spending it on rent.

Don’t automatically assume that you can’t save money. You have options. You just need to decide what is more important to you. If you believe that spending all of your money now and hoping that the future takes care of itself, I suspect that most people who feel that way will be in for a rude awakening later in life.

I’m not suggesting that you live in a studio apartment with three other friends and save every single penny that you earn, I am merely trying to present options. You don;t have to spend everything you earn.

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