Finding extra money to save
Who can save for retirement these days? You can, if you know where to look and honestly assess what you can live without.
Recently I had fun with some of my undergraduate students. I asked my entire class to make a list of the wants (not needs) on which they frequently spend money. Answers varied from smartphones, cable and satellite TV, coffee shops and beverages (I didn't press them on specifics on that one) to such grooming costs as hair coloring, pedicures and the like.
Here are my students' average monthly expenses:
Smartphone service: $150
Eating out: $150
Other beverages: $200
The above amounts total $775 monthly, $9,300 annually.
These are college students; not one holds a full-time job, though many do work part time. They are arguably on the low end of the spectrum of annual income. I mention this only to clarify that, if they can sock away money, so can almost everyone else.
Now, the maximum yearly contribution to an individual retirement account for 2015 is $5,500 ($6,500 for those 50 and older). In other words, the young adults in my class can max out an annual IRA contribution and still enjoy $3,800 left over to invest elsewhere.
Let's say one of my students only can spare half that extra cash to invest, but does have 40 years to invest before retiring. Assuming that the amount stays constant — if anything it's likely to grow as the student's career progresses — four decades of investing $1,900 per year with a conservative annual return of 4 percent results in almost $200,000 saved for the golden years.
If college students can find the money, anyone can. So how do you get started?
First, look at your last three months' bank statements for a representative sample of where you spend money. I recommend using past statements; keeping track of upcoming expenditures will likely skew the data, since you'll likely control spending once you start tracking it.
On your statements, separate the wants from the needs. Be honest with yourself. Do you need or want an expensive smartphone? What about the top tier of cable TV?
Sometimes separating needs from wants comes hard. As I've written before, my students find smartphones a big point of contention: Many students, initially claiming to need the devices, eventually admit that smartphones aren't necessities.
Other examples: Car maintenance might be a need because you drive to get to work; your new car sound system is a want. You need a new stove because your old one quit and you cook at home (saving money on eating out, incidentally); a complete new set of Le Creuset bakeware is a want.
Force yourself to distinguish the needs you require to live and survive from the expenditures on what you merely want. Total your wants expenditures for three months and divide by three to get your average monthly spending on wants.
Now transfer that spending to your IRA. In fact, have your monthly IRA contribution automatically deducted from your bank account. That way you never see the money until retirement — when you'll need it.