Changing the way you think about money can help you change your spending and saving habits.
You probably have a good idea of how much money you earn each year: Your annual salary, your gross income (that’s the total you earn before any deductions for taxes, insurance, and of course, … your contribution to your retirement savings account).
For the purposes of this discussion, let’s say we’re talking about someone who earns $50,000 per year (which is pretty close to the average in the United States).
Saving more means spending less, and that means carefully considering everything you buy. One thing that might help is to think of your spending in annual terms, which means multiplying a thing’s cost by the number of times during a year you spend money to buy it.
If it’s an expense you have, say, 5 times a week, then you might multiply that expense by 250. (5 times a week × 50 weeks per year = 250 days per year; we’ll assume you’ll miss at least 10 days.) Then compare the annual expense to your annual income by looking at it in percentage terms.
Let’s say you buy coffee every workday: maybe it costs $2.30 per day. Calculate: $2.30 × 250 = $575 per year. $575 is a little over 1% of a $50,000 per year. So you ask yourself: Is it worth spending over 1% of your total income for your daily coffee? What if you drank coffee you made yourself, the most financially-efficient way possible. Or maybe tea?
(If you’re not clear on the percent-of-total income calculation, it’s the annual expense divided by the annual income, which in this example is: $575 / $50,000 = 0.0115. Multiply the answer by 100 to put it in percentage terms: 0.0115 × 100 = 1.15%, which, as stated, is a bit more than 1%.)
Maybe you spend $25 each week for something, maybe it’s beer and pizza at a restaurant or bar, or movie tickets, or whatever. Do that every week for a year and that’s $1,250. ($25 × 50 = $1,250.) That’s 2.5% of a $50,000 income. Is it worth it?
Monthly expenditures are easily annualized and percentaged (or maybe it’s “percentualized”?). Just multiply by 12. Do you buy $100 worth of clothes that you don’t need each month? That’s $1,200 per year, which is 2.4% of a $50,000 income. Or maybe your cable TV bill is $120 per month. That’s $1,440 per year, which is nearly 2.9% of a $50,000 income. Is it worth it?
Ask yourself: Is it worth it?
If you’re adding a good-sized percentage of every dollar you earn to your retirement savings, if you have wisely invested your retirement savings and seen them grow from the compounded earnings they generate, and if the total of all your retirement accounts is several times your annual income … then maybe you can reward yourself by paying someone to make your daily coffee. Maybe you can afford a weekly outing for pizza and beer or a movie. Maybe cable TV isn’t a a big deal.
But, if you’re spending 6% of your income on coffee, pizza, beer, movies, and cable TV …and you’re not putting 10% (at the very least) to 15% (or more) of your income into your retirement savings accounts … then I would suggest that you think it over.