By: Enter a very short description of an expenditure you can cut out. Some examples are filled in for you, but you don't have to use them.
I can save: Enter the amount of money you will save by giving up this habit. For instance, if you're spending $25/month at the office vending machine, and you buy those snacks at the store for $5/month, that's $20/month.
Reduce spending for: number of years you will reduce spending. This should probably be the number of years until you retire.
Rate of return: Enter the average annual rate of return on your retirement accounts. In actual fact, rates are currently near relative historic lows (though not as low as years when the markets were losing money, such as the early years of this millennium). Eight percent, though higher than many retirement accounts are getting today, is actually a fairly conservative long-term estimate.
Marginal Tax Rate: enter as a percentage the tax rate of the highest tax rate bracket you belong to.
Daily Spending: Patching the Holes in Your Pocket
Imagine you're someone who buys a can of something to drink from the vending machine at work. If you average five cans a week at a dollar a can, that's an average of $21.67/month, or $260/year (assuming you make a similar purchase on your days off, which is very common). Imagine that everyday you also buy a dollar's worth of snacks from the vending machine. Now you're up to $520/year. Of course, we may avoid vending machines, but most of us have our own version of the $520/year vending machine habit. A three-dollar cup of coffee twice a week will cost you even more.
Think $520/year isn't much? If you put that money in a retirement account yielding an average annual return of 8%, you can expect to be sitting on an extra $19,300 in 25 years. After 35 years you'd be up to $45,492. That might mean retiring a year or two earlier--all from staying away from the vending machines.
Of course, it doesn't make sense to give up the little things that bring you joy. Just don't pay so much for them. You could easily pay less than a fourth of the vending-machine price by buying snacks at a grocery store and bringing them with you to work everyday. That's a savings of $390/year. Better yet, suggest to your bosses that they boost employee blood sugar and productivity by providing snacks along with the usual water cooler and coffee urn.
Other holes in people's pockets:
- Lunching on fast food instead of a bagged lunch
- Buying bottled water instead of just using a filter
- Raising the thermostat rather than putting on a sweater
- Wasting electricity by leaving the computer running all day
- Paying interest by carrying a credit card balance
- Wasting gas on unnecessary driving
- Owning a car that's too expensive or too big (bonus pocket holes if it's an SUV, "sports" car, or minivan)
- Renting too large an apartment
- Buying housing in a "boom" market when renting would be cheaper than the property taxes, maintenance, mortgage interest, and closing costs
Overcoming Delusions about Unnecessary Spending
You can almost hear the objections to the list of wasteful expenditures above. I'm going to stop eating out of the vending machine for my diet any day now! I need my SUV for my rock-climbing expeditions! Bottled water tastes better! Big business puts out a whole lot of advertising and publicity to make sure you think you need an SUV to go rock-climbing every weekend, when the average American isn't fit enough to climb three flights of stairs without taking a breather. Ditto for bottled water (did you know that US governmental purity requirements are higher for tap water than for bottled water anyway?), "luxury" apartments, and a bevy of must-have gadgets that usually end up as dust magnets.
In reality, many of these purchases fall into the category of conspicuous consumption--spending in the hopes of making other people think we are well off. If we all spent as much money on actually becoming financially secure as we did on looking financially secure--well, we'd all be a lot more financially secure. In reality, no one will ever know if your spring water bottle was reused and filled at the tap, and a brand-new car and a used car look an awful lot alike after a couple of months.
Use the calculator to see how much money you could retire with if you cut out some wasteful spending. After all, in 35 years, that SUV probably won't be doing you very much good anymore.