There is an interesting NY Times article that we found last summer entitled 5 Money Mistakes That Can Make the Road to Retirement Even Longer. It has several interesting points to consider, but you don’t need to look past the first mistake to find some really good information:
Increasing Your Spending as Your Income Grows
Many folks think that, in order to become a better saver, they need to reduce the amount that they spend. While this certainly would help, it is very difficult to do. We’ve found that 2 things most often make saving more money easier and more effective:
- Creating a ‘wealth building account’.
- Managing the increases in their rate of spending.
Consider these 2 paths (and the images below):
Household 1 earns $150,000, gets 4% income raises, and saves 8% of its income (much higher than the national average savings rate of approx. 4%). After 20 years of doing this, an average rate of return of 6% would produce a bit less than $650,000*.
Household 2 also earns $150,000, gets 4% income raises, and starts by saving 8% of its income. However, in year 2, it begins to save some of its pay raises…an increase of just 1% more, to 9%. In year 3, it saves 10%; in year 4, it saves 11%. And so on…
After 20 years of doing this, the same 6% average rate of return would produce nearly double…approx. $1.24MM*.
Saving money isn’t always easy; life is expensive, and it often throws us curveballs. It’s important to know that you don’t have to face a future where you spend less than what you are today. You simply have to watch (and minimize) the rate of the increase in your expenses.
Not sure how to set up a “wealth building account” or how to manage all of this; reach out to us to get it started…
*6% rate of return is hypothetical and not guaranteed; this does not relate to any specific financial product.