Don’t Blame the Coffee; Misconceptions About Retirement Savings
The poor cup of coffee is generally blamed for most of the financial problems that people face in this country. The prevailing opinion is that spending a few bucks each day on a cup of coffee keeps people from saving the money that they need to in order to retire comfortably. As a result, many people are cutting back in this area. However, this view is reasonably yet overly simplistic as you will see below.
Is Cutting Coffee the Cure-All?
However, while this advice is well-intentioned, it is not always the cure-all for financial woes that people are facing. From a thematic perspective, the focus on cutting back on things like coffee reflects the belief that small expenses add up over time. This theory holds that putting away small dollars continuously over a long period of time and then compounding it will add up to bigger dollars.
Many people are tired of being told that their coffee drinking habits are to blame for their financial habits. The same advice is being given with a near-constant reminder to cut this unnecessary expense. While many Americans enjoy their coffee and are weary of this guidance, many have begun to cut back in this area. In fact, this type of financial guidance is much like eating your lima beans. You don’t much like it or care for it but know that you have to do it. However, at a certain point, the constant warnings about the daily cup of joe will drown out other effective financial advice due to the fatigue.
Cutting Small Expenses Helps at the Margins
This is the easy financial advice to give and follow because expenditures like this represent the low-hanging fruit. It is relatively easy to cut small things such as eating out one time less each month or doing some of your own beauty and grooming work. Unfortunately, this will only improve your financial situation at the margins and will not secure your retirement on its own.
On the flip side of this, focusing on targeted micro expenditures overlooks the fact that most of the money that you spend is on the bigger expenses that you simply must incur. Many people think of these expenses as rooted in stone and unchangeable. However, this overlooks the true reality of these expenditures and focuses people’s attention in the wrong place. The reality is that people need to be looking at expenses both big and small when they are figuring out the best strategy to save for retirement.
Large Expenses Matter
There is another school of thought that the bigger expenses are what impacts people’s efforts to save for their retirement. According to these people, by cutting bigger expenses slightly, it will have a much larger cumulative effect on your retirement savings. In fact, choosing a smaller home can mean that you save as much as $140,000 more for your retirement. This is more than four times the difference that skipping the daily latte would make for your retirement. This is perhaps the single greatest thing that you can do to turbocharge your savings.
If you are focusing on a large expense where you may have some ability to cut back, look no further than the biggest expense that you have. The average American spends the most amount of money each month on their home. Many people are “house poor,” meaning they spend so much on their home that they are unable to save. Not only is their savings impacted, but it will also drive them into debt because they are stretched just to pay the mortgage and other home expenses.
Of course, if you already own a home, the only way to cut back on your housing expenses is to either refinance your mortgage at a lower rate or to sell your home and slightly downgrade your home. There is absolutely nothing wrong with this approach. Perhaps you are able to look ahead when you select your first home, knowing that you will need to begin saving for retirement at a young age. Or, you can select a more modest home once your kids are grown if your home is not already fully paid off. This will enable you to save much more than just cutting the proverbial cup of coffee.
Combine Savings Strategies
The real trick is to be able to implement a mixture of savings strategies. This will involve cutting things both big and small at the same time and not just focusing on one strategy. You do not have to simply eliminate one thing to the exclusion of everything else. You can have your coffee but perhaps cut a cup or two each week while also trimming other areas of spending at the same time.
Invest Your Savings
The real key to saving for retirement is what you do with the money that you are able to cut off from your expenses. If it is simply sitting there waiting for you to spend, you will eventually spend it. This defeats the purpose of your savings plan. What you need to be doing with this money is to invest it so that your money can work for you. Otherwise, it is earning nothing and will get eaten away by inflation. You do not need to nor should you swing for the fences when you invest. Simply try to grow your money reasonably and responsibly and it will help you in the future.
As your lifestyle changes, you may find certain expenses coming off of your books. For example, as your kids grow older, you will no longer have daycare expenses. Once they graduate college, other large expenses are no longer. The important thing is what you do when your expense picture changes for the better. The right thing to do is take this money and invest most or all of it as opposed to finding another way to spend the money.
The best thing for you is when you combine saving, an early start and investment of your money as a strategy. The sooner you choose this path, the more it will help you in the future, and the bigger it will make your nest egg for retirement. Starting early can also mean that you are able to be less aggressive in saving money, meaning that you do not need to cut back on as much as you otherwise would need.
You are not obligated to listen to every piece of financial advice that you get. Some advice, while well-intentioned, may be wrong or just simply may not fit your current situation. However, even if the financial advice may be annoying, it still is advantageous for you to listen to what you hear and to keep an open mind. The experts can help you look at your own financial picture with a measure of objectivity and provide you with worthwhile and realistic advice to help you save for retirement. The last thing that you want is to be one of the sizeable proportion of Americans who simply does not save for retirement.
