Retirement

9 Retirement Tips For Young Savers

There’s no shortage of advice for young people who are just beginning their retirement savings journey. Take advantage of your 401(k) plan, maximize matching contributions, use a Roth IRA. And of course, avoid debt, particularly credit card debt.

All of this advice is sound, and I’ve doled it out myself many times. But if we stop there, young savers can miss out on a more nuanced understanding that can help them make progress toward a sound financial future. In that spirit, here are nine unconventional retirement tips for people who are just starting to save.

1. Aim for Financial Freedom, Not Just Retirement

Retirement is something old people do. If you’re in your 20s, it can seem silly to make financial sacrifices for an event 50 years in the future. In fact, your own parents may not even be close to retiring.

Instead, focus on financial freedom. Like retirement planning, financial freedom requires that you save and invest money—the difference comes in how you see that money. Rather than saving for retirement five decades from now, you should see the money you save and invest as buying freedom, one dollar at a time.

The benefits of financial freedom are felt quickly. Saving just one month of expenses sets you apart from the nearly 40% of Americans who would struggle to handle a $400 expense. Not living paycheck-to-paycheck is liberating. And as your wealth grows to cover first months and then years of expenses, you will have earned the freedom to live life on your own terms.

2. Think in Terms of Monthly Expenses

Financial freedom focuses on how many months or years of expenses you have saved. Our income and account balances, by themselves, tell us nothing about our level of financial freedom. After all, a $10 million bank account balance won’t last long if you spend $1 million a month.

How much you make is important, of course. The more you make, the more you can save. But focusing on monthly expenses causes you to see your income and savings in terms of how long they can support your lifestyle. Furthermore, it shows you how increasing or decreasing your monthly expenses will affect your journey toward financial freedom.

3. Try to Live As Close to Where You Work as Possible

When I moved to Northern Virginia in 1992, my commute into Washington, D.C., was a breeze. I didn’t appreciate how easy I had it with a five-minute walk to the subway followed by a 20-minute ride into D.C. It was a short commute that cost just a few dollars each way.

After a year we moved into the suburbs. My 25-minute commute turned into a “planes, trains and automobiles” affair that consumed 90 minutes each way on many days. The cost of the commute doubled.

I would live with that commute for the next 20 years.

By my estimation, the expense of bus and subway fares and the parking when I drove have cost me hundreds of thousands of dollars in lost wealth. Then there’s the time lost to long commutes. While I tried to make the most of it, reading on the subway or listening to audiobooks in the car, it still represented time I would have preferred to use differently.

Unless you work from home, commuting to and from work will cost time and money. But keeping these costs as low as possible can go a long way to helping you move toward financial freedom.

4. Spend as Little on Cars as Possible

When we lived near the subway, we owned one car. There was no need for a second car. When we moved out to the suburbs, one of the first things we did was buy a second car. Sometimes we’ve owned three.

Cars cost a fortune. Over a lifetime of car buying, the lost opportunity to build wealth easily exceeds $1 million. That may seem improbable, but had we saved and invested the cost of the cars we have purchased, the compounding of the savings would easily have reached seven figures. Even modest savings by making smart car purchase decisions can generate more than $800,000 in wealth over 30 years.

Of course, many people need to own a car. Today, we own one car. The key, however, is to keep the money you spend on cars as low as possible. It helps to pay cash for a car and drive it for a long time before replacing it.

5. Ask “What If?”

Too often we dismiss ideas as unrealistic or downright silly. Many will reject out of hand the idea of living closer to work or giving up their car, for example. And indeed, there may be good reasons not to move closer to work and to keep your car. But by asking “what if,” we allow ourselves to explore possibilities that can not only improve the quality of our lives, but also put us on a faster path to financial freedom.

Here are some “what if” questions to explore:

  • What if I sold my car?
  • What if I moved closer to my work?
  • What if I changed jobs to live closer to work or to work more from home?
  • What if I got rid of the TV?
  • What if we ate out less, even after a vaccine for Covid-19 is developed?

6. Run Life Experiments

The above “what if” questions are not designed to suggest what you should do. These are personal decisions each of us must make for ourselves. One way to do that is to run life experiments.

For example, rather than selling your car, park it for three weeks. This will give you an opportunity to experience what it would be like not to own a car. The result might be that you keep your car. Then again, maybe you decide that you can live without a car.

7. Conduct a Money Audit Yearly

Often we spend money out of habit or routine. We buy car insurance and continue with the same company even as our rates go up each year. We get a new cell phone and sign up for service, paying for it each month without a lot of thought. Conducting what I call a money audit can help us uncover ways you’re spending money unnecessarily.

The first step is to list out all of your monthly bills: utilities, cell phone and internet, gym memberships and all debts. With this list in hand, go through them one by one, asking the following three questions:

  • Can I get rid of this expense? Maybe you don’t need five streaming services.
  • Can I change the product or service in some way to reduce the cost? For example, you might increase the deductible on our car insurance to reduce the premium or refinance a loan to a lower interest rate.
  • Finally, can I get the product or service for less money? Be sure to comparison shop once a year to see if you can lower the cost of everything from a gym membership to car insurance.

8. Automate Saving and Investing

It’s common advice to automate your finances. Research shows that automation helps people save more money. For example, employees participate at higher rates in their employer’s retirement plan when they are automatically signed up. One recent Vanguard study showed the participation in employer retirement savings plans nearly doubled from 47% to 93% when employees were automatically added.

As you conduct life experiments, ask “what if” questions and undertake money audits, you’ll find ways to reduce your expenses. Once you do this, it’s critical to take that extra money you’ve freed up and add it to your automated savings and investing. This can take the form of higher 401(k) contributions or emergency fund savings, or raising the amount of your monthly debt payments.

The key is to use automation to put the money you’ve saved to a good use. If you fail to do this, it’s likely you’ll spend the money and have nothing to show for it.

9. Think Small

With the power of compound interest, saving even relatively small amounts of money can generate substantial wealth over time. Over a 45-year period, for example, investing $100 per month at an 8% return generates over $500,000 in wealth. At a 9% return the amount jumps to almost $750,000. These rates of return are well within the norm for long-term S&P 500 fund returns.

This underscores two important concepts. First, compounding over time is powerful. It generates more money than many think even possible, even when we invest small amounts of money. And second, the rate of return is a critical component. Seemingly minor changes in the return assumption have a big impact on the outcome over a lifetime of saving and investing.

Keep this in mind as you consider where to live, what to drive and how much you might be able to save through a money audit.

This article was originally published on Forbes

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