Wealth Building Lessons

If you’re one of those people who likes to live the high life, you probably don’t realize how much your spending will end up costing you in the long run. Unless of course you have a trust fund and don’t need to worry about money, there’s a good chance you’re spending more money than you ought to, and thus not saving enough for retirement.

While its difficult to curb your spending, you can still make a difference. What you try to do is cut down on certain expenses without making a signficant lifestyle change. You don’t drop the expense, you modify it so it costs less. Maybe use a cheaper brand or a less expensive service. And you invest the difference.

For example, suppose you’re paying $99/month for cable TV. I’ve found out that if you call up the cable company and negotiable with them, you an usually get some sort of promotional discount. If you don’t get a discount, maybe you decide to downgrade to a lower package that costs only $75/month.

Now a savings of $24/month doesn’t sound like much to get excited about or a way to create wealth but let’s plug the numbers into the Lifetime Savings Calculator and see what comes out of it.

Press the ‘Compute Savings’ button to find out what our lifetime savings are:

Now we enter what interest we think we can get. Let’s assume we can get 6% (You should be able to get more than that but let’s assume there’s 2-3% worth of inflation).

Pressing the ‘Compute Future Value of Invested Savings’ button we find the following:

Summary: If you were to permanently switch from the $99 product to the $75 product, and then invested the resulting monthly savings in an investment that earned 6% per year, between now and age 65, you would then be able to withdraw $168 from your investment each month…for the rest of your life!

Now suppose you like to buy a new German performance car every 3-4 years. You decide to curb your spending a little bit and instead of spending $475 per month on a new car you decide to go with a slightly used version of the same car and end up spending only $400/month.

Making this sacrifice has significant benefits. According to the Lifetime Savings Calculator, investing the difference at 6% would give you an extra $526/month in retirement.

Making a few modifications can substantially boost the amount of income you’ll have in retirement. Seeing how even the slightest changes in your lifestyle can add up and make a difference you quickly realize that realizing an additional $1000/month shouldn’t be too difficult to achieve.

As Benjamin Franklin right said, “A penny saved is a penny earned”.

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