Advisor Insights LIfe's Curve Balls Retirement

Why is it so hard to save money?

Written by: David D. Carroll CFP® / BCJ Financial Group

Why is it so hard to save money? Maybe you are looking at the wrong piece of the pie.

I think it is fair to say that is it hard for most of us to save money. When I talk with prospective clients about the amount of money that should be saving to insure a successful retirement, most look at their lives, their take home income versus their expenses and think it is just impossible.

Let’s look at why. The chart is an approximation of the major categories that make up the “average American’s” cash flow.

2016-01-26_9-44-54

Chart Source: First Financial Education Center

We usually don’t think of taxes and debt payments as flexible, so any discussion of increasing savings is thought of coming from the lifestyle slice.

Meaning what? – Sacrifice. After all, saving is the deferral of the enjoyment of what the money could be used for now, for the enjoyment of its use at some point in the future.

So where do you cut? Entertainment or eating out are two usual suspects of discussion. Often the most enjoyable things of your current day to day are targeted for cuts or elimination so you can use that money for something in 30 years. That’s a very tough choice and takes a very disciplined and motivated person to do it. Kind of like staying on a diet. We know how that goes for most of us!

The average American household earns $2,154,280 in their lifetime and has a little over $100,000 saved for retirement.1

Something has to change. Certainly we can find a bit here and there (turning the water heater down 10 degrees save 3-5% of your water heater bill). You aren’t going to retire on that (even if you did actually put the savings in the bank or investments). I want to suggest that only looking at Sacrifice is the wrong approach.

A better approach is to target the Debt slice – I am not talking about only paying cash for everything; but a process that transfers the payments (34% of your lifetime income remember) from going to the bank, credit card or mortgage company’s balance sheet to your own retirement balance sheet.

How significant can this be to your success? Let’s look at an example. (Names are changed to protect the innocent)

Tom and Mary are their late 40’s. They both make a good income, bringing in a combined salary of $106k annually. Although they are not able to save much currently, Tom and Mary have accumulated $171k in their retirement plans/IRAs.

They have a pretty typical debt scenario, including a mortgage of $233k, cars, credit cards, college loans – all totaling about $61k.

With a grand total of $294k in debt, Tom and Mary are paying $3,054 per month towards their debts. Without adding any additional debt, they would be debt-free in 27 years – to the tune of $456k in principal and interest.

Without any additional sacrifice (increased monthly savings/lifestyle cuts), and just by attacking the debt slice of their pie, their new future looked like this:

  • Out of debt to financial institutions in a little over 8 years
  • Paid themselves the $3,054 per month after the 8 years
  • $1,043,820 in retirement fund (assuming 4% return per year)

This is the equivalent of going from no savings to saving 20% of their current income, which would have been impossible for them using the Sacrifice approach only.

We often use the phrase “Pay Yourself First” as a way to make the sacrifice seem not so bad. We should be saying “Pay Yourself, Not the Banks”.

 

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BCJ FG 16-38

1-Median Household Income in the United States, 2014 – Updated 10/21/15. Economic Research – Federal Reserve Bank of St. Louis [1/25/16]

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