Retirement Planning For Dummies. Matthew Krantz
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alt="Remember"/> The goal is to squeeze the most happiness out of the money you have.
I doubt that you get much joy paying rent, paying taxes, and saving. So the goal is to satisfy those needs in such a way that money is left for fun. People get into trouble when they get this mix wrong. Some overspend on overhead (such as an expensive apartment or a too-big house). Others fail to (legally) minimize taxes. And some overspend on fun stuff while neglecting their savings.
Yes, getting your spending balance right takes some practice. But this section will help you find ideas that work for you. Remember, only you can decide what’s important to you.
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Figuring out if your latte is ruining your retirement
Most personal finance writers demonize the morning brew from your local coffeehouse. But to me it’s a perfect example that pulls together everything you’ve discovered in this chapter.
Next time you drop $4 on a cup of coffee at Starbucks, consider the following questions, which apply to any type of spending:
Have I taken care of my overhead, savings, and tax? If you've paid your mortgage (or better yet, paid it off), have maxed out your 401(k), and are paid up with Uncle Sam, a $4 cup of coffee won't hurt you. But if you’re behind on any of these, the math changes.
Is this a habit? Are you buying coffee every day solely out of habit? Routine spending can add up while the happiness you get from it declines. If you spend $4 a day on coffee, that's $1,460 a year. After you calculate your run rate, decide whether the $1,460 a year translates into that much happiness. Think of another budget item that costs about $1,500 a year. Does that spending make you as happy, or happier, than your coffee habit?
Do I understand the total cost and is it worthwhile? Spending has an opportunity cost. For example, you could have saved or invested the $1,460 a year that you’re spending on coffee, bringing in even more money.
Here’s a fun exercise. Figure out the monthly cost of a discretionary item. Then log in to MSN’s Time Value of Money calculator (www.msn.com/en-us/money/tools/timevalueofmoney), put that amount in the Monthly Investment field, and change the Present Value field to 0. Select the Calculate button and look at the results. For example, if you put the monthly amount for morning coffee ($122) into a savings account paying 2.5 percent annually, it would be worth $16,613 over 10 years, as you can see in Figure 2-6.
FIGURE 2-6: Calculate how much that daily latte really costs.
And check this out. If you invested the $122 in the stock market and got an 8 percent annual return, you would have $21,208 in a decade.
Finding easy ways to stop wasting money
Few people enjoy saving money, but no one likes to waste money. And if you’ve followed my advice up to this point, you possess great insight into where your money is going.
But simply not wasting money is just the start to building a much better financial life for yourself. Over the years, I’ve seen the following easy ways that everyone can improve their financial situation:
Save first. The easiest and least painful way to stop wasting money is to never see it in the first place. If you work for a company, sign up for a 401(k) immediately, and make sure you have enough taken out of your paycheck to qualify for any company match. The savings contributions will be taken out of your paycheck, and you won’t miss what you never thought you had.If you don’t work for a company and are self-employed, you have many options, too. I cover those in more detail in Chapter 6.
Scrutinize subscriptions. Are you really using three music streaming services, or did you just forget that you’re paying for them? Also determine whether you're spending more to subscribe than you would if you bought or rented the object. For example, if you’re watching only one movie a month, you’re better off just renting than paying a monthly fee.
Consider the total cost. This tip is related to subscriptions. Companies know big costs look smaller when you pay for them monthly.
Know that few objects you buy will make you happy. Studies show that buying things rarely makes you happy. Billionaire investor Warren Buffett lives in a home in Omaha, Nebraska that he bought in 1958 for $31,000. Experiences and anticipation of good things in the future bring more lasting joy for most people than any material goods.
Boosting your income with a side gig
Retirement planning is partly about wasting less money so that more is left for you to invest. Another powerful way to boost your retirement it to drive your income higher.
Along with the “saving more” guilt trip, another personal finance saw is to “make more money.” But let’s face it, not all of us can or are willing to switch jobs or careers just to boost our pay. However, if you’re looking for something less disruptive to your life, a side gig can be a powerful way to increase the amount you can save. A side gig is typically
A task you do on the side, preferably something you enjoy: For example, you might make Halloween costumes and sell them on Etsy or eBay. Or perhaps you take photos that others can purchase to use on websites.
A way to take advantage of an underutilized asset: Have a beach home? Consider renting it when you’re not there. Or why not rent your car when you’re not using it? Check out Getaround (www.getaround.com), which handles the insurance details when renting your car.
Side gigs come in many forms, and finding this type of work is easy. Although none of these side hustles will make you rich, added income can turbo-charge your retirement plan. (In Chapter 4, I cover how SEP-IRAs and other retirement plans can help you turn side gigs into a bigger retirement nest egg.)
While you’re still working, a side gig enables you to earn more money to pad your nest egg. And your side gig might turn into a profitable activity