Saving for retirement is a really important thing to do. But unfortunately, it may be hard to wrap your head around that need when you're fairly young and have different financial priorities.
When you're in your 20s, you may be focused on paying off student debt. In your 30s, you may be grappling with child care costs while trying to save for a home. And in your 40s, you might have that home, but your mortgage payments might monopolize a lot of your income.
None of this is particularly unusual. But if you don't start building your nest egg at a fairly young age, you might struggle to play catch-up down the road. If you want to set yourself on the path to being able to save consistently, then it pays to be really careful with certain expenses. Not being mindful enough of the following could leave your 401(k) or IRA seriously lacking.
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1. Housing
Housing is many people's largest recurring expense. But if you take on too large a mortgage, you might end up with little money left over for retirement savings purposes.
As a general rule, it's best to keep your monthly housing costs to 30% of your take-home pay or less. And that 30% figure should include all predictable expenses you might incur in the course of owning (or renting) a home, like property taxes and insurance.
2. Your car
You may need a car to get places, whether it's the store, your job, or doctor appointments. Owning a car isn't necessarily a luxury. But owning a fancy one is. And if you're spending a large amount of money on a car, that could be getting in the way of your ability to save for retirement.
3. Credit card debt
Every dollar you pay a credit card company in the form of interest on a carried balance is a dollar you can't save and invest for your retirement. You might think that carrying a relatively small balance isn't a big deal. But small balances have a sneaky way of escalating over time and impeding other financial goals.
Keep your expenses in check
You really don't want to end up cash-strapped later in life due to unfavorable choices made during your working years. So to that end, keep your home and car expenses low relative to your income, and aim to avoid carrying debt in credit card form. To be clear, this doesn't mean you should never use a credit card. Rather, aim to pay yours off in full every month.
Believe it or not, it actually doesn't take a ton of monthly savings to accumulate a large nest egg if you give yourself a long enough wealth-building window. If you save $250 a month in a retirement plan over a 40-year period during which your investments generate an average annual 8% return, which is just below the stock market's average, you'll end up with a balance of about $777,000.
But you need a way to come up with that $250 a month. And if you're spending a lot of money on a home, car, or credit card interest, that may not happen. So for the sake of your future self, avoid taking on too much house, drive a modest car, and steer clear of credit card debt to the best of your ability.
