How will you know if you have saved enough to retire by 30, 40, 50, or 67? There are numerous online calculators at TRowe Price, MSN Money, FIREcalc , Personal Capital, Fidelity, and others that can help you calculate what your needs are based on your current holdings, time horizon, and risk tolerance.
My bet is that most people are not saving nearly enough to retire at the traditional age of 67. While the topic of savings can be touchy, let me share with you a couple of secrets for becoming more aggressive moving forward.
Rough start, strong finish
I believe that the typical blog reader has probably been able to save something by this point. I know for me, in my 20’s, I bought everything I could afford and then some on credit. This meant very little or no savings was happening. In my 30s, with my first daughter arriving, I got a real wake-up call about saving for a college education and my own retirement. In my mid-30s on to age 40, I formed much better saving habits. After a separation at 44, I knew I needed to turbo-charged my savings.
A divorce and moving 1,000 miles away at age 45 has a sobering effect on a person. For me, I had to start over with no furniture and only a pickup truck full of personal items. I made a conscious effort to begin anew, refusing to accumulate all the stuff I thought I needed to live. Child support and only one income also helped form a new appreciation for managing my money wisely. I began to evaluate my purchases carefully and made great efforts to save what I could.
I had planned for many years to retire at an early age. The divorce certainly set me back but did not change my resolve. What it did force me to do was recognize my strengths and weaknesses around saving money. My plans are still in place today to retire in the next year with the savings and passive income streams that I have built over the years.
What happens if you have not saved enough or don’t have a passive income you say? I would like to describe to you just one basic principle with two “secrets” that have worked well for me for over ten years.We have opportunities every day to shape our savings habits
We are faced with so many opportunities to spend money in a typical day. Your daily spending could include Starbucks, lunch with co-workers, dinner, drinks, dry cleaning, groceries, and clothes shopping.
The weekend adds another dimension that may include boating, travel, entertainment, and other spending opportunities. We work hard, so we deserve to spend some money, right? We have become so conditioned to spending that with most of the smaller purchases we mindlessly hand over our credit card to the clerk, hostess, or cashier to pay the bill. Do we really even know what we just spent?
The house becomes another fiscal challenge for those trying to fast-track savings. If you are in a condo or townhome you have homeowner’s dues. If your home is a single-family residence, you need all the tools for home maintenance: lawn mower, trimmer, garden utensils, hand tools, painting supplies, and the list goes on. If you like working on cars, don’t forget about the jack stands, air compressor, and specialized pneumatic tools.
What if you don’t have all these tools and gadgets? That means you need to hire out all the work to be done. You now need a gardener, housecleaner, painter, and handyman on the payroll. Take a look back at the last 50 years and only the wealthy would have been able to afford these services. We have now made this our new minimum standard of living, somehow making these items and services a necessity.
Do we really need 500 channels of TV, the newest electronic gadgets, and 4 cell phone lines per household? Why do need more than one car per licensed driver in the family? Unfortunately, I have been to too many funerals in the last few years. As of yet, I have not seen a single moving van following the funeral procession, ready to bury their toys with the dearly departed.
These are all subtle changes that have happened in our own generation. Just take a walk through your garage, storage, or closets from the perspective of an anthropologist 500 years from now. What conclusion would they draw from our lifestyles today?
To begin to change our thoughts around saving, we need to take a look at spending. I would like to offer a couple tips that have worked well for me.
Secret #1 – Evaluate every expense
A great book that had a huge impact on how I viewed time and work was The Four Hour Work Week by Tim Ferris. He talked about creating a live style, removing yourself from the office, and eliminating all the unnecessary time wastes in your life. He describes this as one element of what he coined as the new D.E.A.L. The “E” stands for elimination. I have taken this principle down to the level of spending.
Ask yourself at each purchase; 1) Do I really need this item? 2) If so, is there a no-cost or low-cost way of obtaining it? 3) If I need it, can I wait 30 days and go back to question 1? I found that this really slowed down the buying process.
Another major financial habit change for me was to eliminate nearly all personal use of my credit card. This forced me to use cash, a check, or my ATM. Since I don’t have unlimited funds sitting in my checking account, I must be conscious not to spend more that what I have available. I estimate this saved me easily 15% to 20% of my discretionary spending on a monthly basis. I have paid my one major credit card (American Express) off in full each month for decades. My internal thought justification for using the card was accumulating all those card rewards points. It is amazing how easily it was to overspend on credit.
We are a nation that craves the latest tools, gadgets, or toys. I have personally owned many of these things. Starting over I did not want to clutter my life with all these things that require more space and cost to maintain, insure, and generally add clutter to our minds and garages. I have now created the time and freedom to explore personal development, health, and early retirement.
Secret #2 – Automate your savings
The simplest way to build any savings program is to pay yourself first, automating the process. As humans, we are amazing creatures, always finding a way to adapt to changes. One change you must make is to set aside a set percentage or dollar amount every pay period to an investment account. (We will discuss in the future how to invest this money). I recommend that everyone should be saving a bare minimum of 10%. If you are like me in my fifties and wish to retire early, you will need to save much more if you have not built a nest egg already.
Am I hearing you say that you can’t possibly save anymore? I used to think the same thing.
Take a hard look at your lifestyle and evaluate what you spend money on. A couple great places to start are by reviewing your checkbook, bank statements, and credit card bills. Do we really need to spend $300 per month for cell phones and cable TV? Those are all necessities our parents seemed to live without. Do we need multiple foreign luxury cars? Couldn’t we try to find a way to clean our house or mow the lawn ourselves? Grandma and Grandpa would be rolling in their graves if they knew what we spent money on today, feeling we could not live without it!
I realize it is not easy. We must strengthen the habit of our money saved first; what is left over is used to pay the bills. Over time we magically figure out how to live on the remaining money. Just as your work expands to the amount of time you have, so does the amount of spending relate to the money available.
Whenever any windfalls, raises, or secondary income is received it is important to place this new money into savings as well. You will soon be amazed as time goes by that you are able to save and live on what is left. Hopefully you will then take a closer look at your spending and find new creative ways to set aside more and more each pay period.
If you are married, a great goal would be to save one whole income. This will certainly turbo-charge your efforts to reach early retirement!
Putting your saving habits into place
The key for me has been to slow down the purchasing process and ask myself some questions.
- Do I really need this?
- Is there a low-cost or no-cost solution?
- Can I wait 30 days?
When you reflect on these simple questions such and combine that with paying cash for everything, a new awareness to spending habits will develop. You will be building your awareness and savings muscles.
The money we have saved by this strategy has allowed us to considerably increase our savings percentage over time. The savings has been the driving force in our debt snowball, plowing toward financial independence. Automating the process made it simple and became our new normal.