Cut Your Spending, Save it for Your Retirement

Almost all people don’t really know what excessive spending may hurt them in the long run. When they are closer to retirement, they get much smarter about what things really cost them. For this “born again” financial savvy person, cost is not just the some amount of money being paid for buying things, or even any associated interest costs. The cost is really in lost of potential savings that could have been compounded into very meaningful numbers needed in retirement—and you should remember that retirement can easily be one-third of your total life. If you spend much of your saving early after retiring, it will jeopardize your retirement dream. You won’t be able to recover other than having smaller budgets every year.

Now we can illustrate the point above by using some amounts of money. We’ll use a thousand dollar as our basic amount. A thousand dollar represents some additional options we just had to have on our new automobile, or it could be an upgrade to our PC, or a high- speed integrated system of cell phones and Internet service, or any one of the hundreds of things we need to spend money with all too easily to spend a thousand dollar on—and watch those matters become worthless only in a few years.

There are several factors that determine why those things decrease their value. The first factor is to determine how many years you could have compounded the savings until you reach that point in retirement when you would withdraw the money. The second thing is to ask whether you purchase them by credit or cash. If you buy on credit, you can really run up your money just only to pay interest payments. Let say that your interest rate is 15% and you spread the payments by 4 years, at the end you really pay $1,749 for your $1,000 item. Many people who buy with credit cards will have to pay 18% interest and let the balance run for up to 10 years. How shocking it is to know that the amount you must to pay to $5,235!

But this isn’t the full extent of the real cost to you, there is a hidden cost you’re not aware off. The real cost is the amount money that supposed can be put to your retirement savings. This in turn depends on whether you could have saved the money in 401(k) or an IRA accounts. If you have to reduce your contributions to a tax-deferred account to pay for your one thousand dollar purchase, then you drop off the initial tax deduction as well as the benefits of tax-deferred growth.

But in the case of without the tax reduction, a thousand dollar item can cost you dearly. Let’s say you pay cash, use no credit, you can take the $1,000 out of your current savings, and have already made the maximal contributions to tax-deferred savings accounts, so you aren’t in reality losing any deductions. Consider what happens if you have 30 years until you retire and your mutual fund gives a steady 10%. In this scenario, the least that $1,000 could cost you at retirement would be a decrease in your savings of $17,400. This is the reason why most rich people are meticulous about how much money to retire.

Let’s take that above calculation a step further. When you decided to buy by credit, you get higher cost and the money you have spent forbids you from investing it into an employer’s retirement savings plan. For example, if you will retire in 30 years ahead, that $1,000 plus the credit card interest, without including any employer’s matching contributions, would shrink the amount you put in savings by $5,235. There is necessity for paying tax deduction you get from sheltering the $1,000 in a deferred tax plan. With 15% tax rate, that’s another $785, because you could have used that $150 tax saving to reduce your credit card debt. Now, compound the sum of $5,235 and $785 for 30 years at 10% and you get a loss of $105,000 that should be put into retirement savings. If you had foregone the opportunity to contribute to an employer’s savings plan with 100% matching contributions that would have cost $210,000!

Face it. In retrospect, wasn’t most of that stuff just junk? Look in your attic. Look in your basement. Think about the beating you took when you tried to sell your old PC; think about how fast the newness and pleasure of most of your toys wore off. We’ve all blown money on dumb purchases. But those who can recognize a dumb purchase earlier actually turning over the money are the ones who will still have something to spend during their retirement time.