Posted by Tim Stobbs on April 1, 2009
Ok to be fair I understand why people don’t do things to save a few dollars a month. In some cases you don’t think it’s worth your effort, while in others it has more to do with being lazy. I know that saving $5 here and perhaps $20 there doesn’t seem like a lot of money, but in fact it is.
You see savings is literally a two edge sword to hack your way to a early retirement regardless of the fact if the markets aren’t doing so good. Why? Because if you permanently reduce your spending on something you save twice. Once is the obvious savings of you have more money to save a month and the other is the fact with a lowing spending lifestyle your retirement target just got smaller as well.
To demonstrate this concept I’ll provide an example. Let’s say you made the following minor changes to your lifestyle:
- Skip paying for movie rentals and use the library and get them for free. $20/month
- Take a lunch to work instead of buying one extra day a week. Save $40/month
- Find a free chequing account and stop paying those fees. Save $5/month
- Go meatless on at least one meal a week. Save $20/month
- Skip eating fast food once a month. Save $15/month
Grand total $100/month. Hardly earth shaking kind of money. After all you are only saving an extra $1200 a year.
Yet that amount does matter. You see first off if you start saving that amount at even 5% rate of return in 15 years you will have about $26,700. Then add the fact if you make those savings permanent you no longer need that amount of capital to spin off that income. So if you use the 4% safe withdrawal rule that $1200 a year is actually worth $30,000 less in retirement savings that you no longer need.
Add it up and that’s $56,700 of savings total. Not to bad for a bunch of minor changes to your lifestyle. So the next time you can save $5 without reducing your happiness I highly suggest you do it. The change by itself won’t be much, but if you keep at it there is no reason why you can’t reduce your retirement target by a year or two.