Are you fretting about your lack of savings and the amount you're putting away for retirement? Well, me, too. I always do. Today I want to tell you the best way I've found to accumulate money beyond setting aside part of your paycheck each month. It's fairly easy and fairly painless, and it could add up to hundreds of thousands of dollars by the time you retire.
Easy as 1, 2, 3
Here are the three initial steps:
- Sit down. If you can get family or friends to sit down with you, the process is going to be much, much easier.
- Brainstorm and come up with as many ways as you can to cut at least $100 in expenses over the next year. (Charles Jaffe of MarketWatch recommends identifying eight ways to cut $500, because the resulting $4,000 is enough to fully fund a Roth IRA. I like that idea.)
- Over the course of the year, capture those saved expenses by dropping the money into a special savings account set up for this purpose.
Tips and other tidbits
If you don't know where to start, let me offer some suggestions. Most of these are fairly painless because they won't really lower your current standard of living:
- Capture your next pay raise or bonus check and sock it away in the savings account. A 4% raise on a $50,000 salary will net you about $1,600 after taxes. That's a great start.
- Eat out just one less time per month. If that saves you $50, that will turn into $600 by the end of the year.
- Scan your recurring monthly bills to see what is sucking you dry for little in return. For instance, will it really affect you that much to cut back a tier on your cable TV plan or drop a movie channel? Sending $20 a month less to Comcast (NASDAQ:CMCSA), Cox, or EchoStar's (NASDAQ:DISH) Dish Network will save you $240. Don't forget to check your cell phone plan for superfluous features or needless extra minutes.
- And really, how hard would it be to deny Starbucks (NASDAQ:SBUX) or Krispy Kreme (NYSE:KKD) $20 each month for their coffee? Actually, it isn't very easy, I know. Both companies offer wonderful and addicting products. But if you can skip even just a couple of days a week and either bring your own java or brew some in your office kitchen, that's another $240 in the bank.
- Add up the moola you shell out for lunch. Don't be surprised if it's at least $200 monthly. Bringing your lunch to work two or three times a week will not only save you a lot of money, but it will also mean healthier eating. Nothing wrong with McDonald's (NYSE:MCD) now and then; I eat there myself and applaud the lower-fat offerings. But you can't beat feeling better and losing a little weight while you bulk up your retirement savings!
You (and your family and friends) can probably come up with several more ways of meaningfully cutting expenses. As you go through the process, you'll come to appreciate and understand how highly efficient companies like Anheuser-Busch (NYSE:BUD) and Procter & Gamble (NYSE:PG) provide consistent profits and outstanding returns to shareholders over the decades.
Now, put the money to work
OK, so you're going to start socking the money away. Now, let me show you your potential payoff. Let's say you scrape together $4,000 each year:
| Put your money in ... | Which yields* | 20-year payoff | 34-year payoff |
|---|---|---|---|
| Mattress | 0% | $80,000 | $136,000 |
| Bank savings account | 2% | $99,133 | $195,978 |
| Index fund | 10% | $252,010 | $1,080,097 |
| Index plus a few | 12% | $322,795 | $1,722,654 |
"Index plus a few" is a strategy that involves keeping most of your portfolio in an index fund. But if you have the time and skill (or the help) and want to add a little juice to your returns, you can set aside 5% to 10% for individual stocks. For some poetic justice, and to bring this article full circle, a basket of the companies mentioned in this article returned an average of 415% over the past 10 years, versus the S&P 500's 106%. That even takes into account Krispy Kreme's great fall (and the fact that it's only been public for six years). Now that's how to make money off these great companies, rather than give it away to them!
Start now
Of course, you needn't have stock-picking skills to enjoy the advantages of indexing. But if you want to try, a free trial to the Motley Fool Rule Your Retirement newsletter will give you not only specific stock recommendations but also which mutual funds, bonds, and even savings accounts to consider. Here's more information on the 30-day free trial.
Rex Moore captured his last pay raise, but it got away. Of the companies mentioned in this article, he owns shares of Anheuser-Busch and Procter & Gamble. Anheuser-Busch is a Motley Fool Inside Value recommendation. The Fool has adisclosure policy.
