How saving $20 a day can make you a millionaire

How saving $20 a day can make you a millionaire

Making a commitment to save and then taking a few important steps can set you up for financial success.

If there is one thing that worries me on a regular basis (okay, to be fair this is only one worry on a long list), it is the slow-motion train wreck of Americans aging into their retirement years.  Or not retiring, as is more often the case.  My mother is in her 70’s and her peer group is mostly living off of a combination of pensions and Social Security.  I’m afraid that she will be one of the last cohorts of folks who will have this stable lifestyle in their golden years.

When I look at people slightly younger than my mom (and to be honest, a few in her age bracket as well) I am seeing folks who “can’t afford to retire.”  Maybe they didn’t have a job that offered them a pension like my mom and her friends take for granted (sorry Mom, but your friends do take this for granted).  Maybe others thought that Social Security was going to take care of all of their financial needs, not knowing that historically Social Security was thought of as one leg of a three-legged stool (pensions and personal savings being the other two).  Now they are finding that they cannot realistically live on one-third of their income.

And don’t get me started on that fact that so many older Americans are still paying mortgages and student loans.  Does anyone remember that adage about paying off your mortgage by retirement so that you could live mortgage-free?  In 2018 that sounds like a pipe dream.  And for those Baby Boomers who are still paying student loans (theirs and/or their children’s)?  Ouch.

I am not sure how we are going to support older Americans in their golden years as we hit the first wave of workers who were given the “freedom” of funding their own retirement accounts with 401(k)’s.  But I sure hope that I am going to part of the solution to this problem.

Rant aside, how can YOU get on board to saving for your retirement so that you can one day retire?  It might be easier that you think.

Save $20 a day

Maybe the way to adequately prepare for retirement is to save $20 a day.  You may read this is and be having one of two thoughts:

1)      How the heck am I going to save $20 a day?! 

or

2)      How is saving only $20 a day going to substantially fund my retirement account?!

Let’s discuss both of these concerns…

How to save $20 a day

What is the easiest way to save $20 a day?  The easiest way to save $20 a day is to (drumroll, please) just do it.  Use either direct deposit from your paycheck or automatic transfer from your checking account and set up a system to move that money into an IRA or other retirement account on a regular basis.  If you set up an IRA at a low-cost brokerage firm and elect to auto-transfer many times they will waive the minimum required contribution. 

And now you may be thinking, “Kimberly, you don’t know my life!  How am I going to live without $20 a day?”  To this I respond it might be easier than it sounds.  Another blog that I like to read is Afford Anything and in one post author Paula proposes something called the anti-budget.  Intrigued, I kept reading to learn more about this mysterious notion (you can read the complete post here). 

The crux of the anti-budget is that you set up your auto-transfer into your various savings vehicles (emergency fund, vacation fund, down-payment-on-a-house fund, retirement fund…you get the picture) and then you spend the remaining money on whatever you want.  Of course you need to have the funds to cover your housing, utilities, food, medicine, insurance, etc. but when you think about it, the anti-budget is freeing.  After you have made a commitment to your future financial success you can relax and enjoy the day-to-day.

How saving $20 a day can fund retirement

Okay, let’s move on to address your second concern.  How can saving only $20 a day adequately fund a retirement account?  This is where time and the magic of compound interest come into play.

First, think about how much you might need to earn in a retirement fund.  Let’s say that you are 30 and make $52,000 a year and that by saving $20 each work day (or $100 a week) you will be saving 10% of your gross annual income.  Then let’s say that you will need to spend $46,800 a year in retirement to fund your current lifestyle.  This is possible because you will have already been living on $46,800 a year by saving 10% of your income.

We can apply the much-used equation for forecasting your retirement savings goal:

                                Annual income x 25 = retirement savings goal

                                $46,800 x 25 = $1,170,000

Now you know that you will need to generate $1,170,000 to retire at your current standard of living.

Second, consider the stock market returns over history and make an estimate of how much you need to earn in your IRA.   For this example let’s use a goal of an 8% rate of return.  For you to reach a goal of $1,170,000 with an annual contribution of $5,200 at an 8% annual rate of return it will take you about 37 years to reach your goal.  Look at Nerd Wallet’s retirement calculator here to calculate it for yourself.

Simple but not easy

This is a simple explanation of how saving $20 a day can generate a $1 million+ retirement account over the course of your working life.  Will adjusting your current spending be a challenge?  Most likely, yes.  Is building a million-dollar retirement account something that you can do?  Again most likely, yes.

What are your thoughts?  Does this seem feasible to you?  Can you picture yourself succeeding?  Leave a comment and let us know!

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Talking About Money Book Club: Dollars and Sense by Dan Ariely and Jeff Kreisler

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