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Are you on track for a comfortable retirement? If you answered "no" or "I'm not sure" to that question, you're not alone. In fact, the majority of Americans are worried about having enough money to retire which is why finding extra money to save is so important. With that in mind, here's how the average American spends their money, and how you could painlessly cut back in a few areas that could result in lots of extra savings when you're ready to retire.
It's all about cutting back
If we look at the spending habits of the average American, we can see where we could most easily trim our expenses and find extra money to save.
According to the Bureau of Labor Statistics, the average American household's pre-tax income was $66,877 and expenditures were $53,495 in 2014, the latest year for which data is available. Breaking it down into categories, here's how the average American spends their money:
Data Source: Bureau of Labor Statistics
When you look a little deeper into these numbers, we can see some areas where we could cut back. For example, the $6,579 spent on food works out to about $126.50 per week, which sounds pretty reasonable. However, $2,787, or 41% of this is spent on eating out -- which is almost always more expensive. If the average American could trim the money they spend dining out by just 10%, this would translate to an extra $279 in savings per year.
Get a little creative
There are all sorts of creative ways you could cut back. I know that by this point we've all heard the "give up the latte" and "get rid of cable" tips, so here are a couple other suggestions that can help you save.
- The average monthly electric bill is $110.20. If you turn lights out when you leave a room, keep your air conditioner or heater a couple degrees warmer or colder than you'd ideally like, you could trim 10% or more from this cost. A 10% electric bill reduction means $132 in annual savings for the average household.
- The average American spends $952 per year on homeowners' insurance and just over $900 per year on car insurance. These are large expenses, but you might be surprised at how much you can save by shopping around. Assuming that you're able to save 10% on each by shopping around, this translates into $185 in annual savings.
Finally, there are some things we just don't need to be spending money on -- at all. The average person spends $151 on fees associated with their checking account, which should be avoidable if you shop around for a bank or credit union.
Another thing we need to stop spending money on is credit card interest. The average American household carries a credit card balance of $5,833, and the average credit card interest rate is just over 15%. This translates to $875 in interest per year. By consolidating this debt with a personal loan or line of credit at 7% interest, the average credit card debtor could save $467 per year. Transferring the debt to a 0% APR balance transfer card would be even better.
This is just a starting point of ways you might be able to scale back your other expenses -- especially the unnecessary ones -- in order to save more for retirement. If you just use the five suggestions I mentioned here, it could save the average household more than $1,200.
But, it's not just $1,200 you're saving
Here's the key takeaway: setting aside money for retirement is a lot more valuable than you might think. If you invest it, the money you save now can grow and compound until you're ready to retire. In fact, based on the historical average returns of the stock market, $1,200 saved today could be worth over $7,350 by the time you retire.
Even more impressive, if you manage to save an extra $1,200 every year for 20 years, it could add an extra $65,000 to your retirement nest egg. And, the effect can be even greater if you have longer until retirement.
My point isn't to discourage you from treating yourself. It's important to go out to nice dinners from time to time, or to buy yourself something you've had your eye on. Rather, my goal is to get you thinking about how your spending adds up, and about the long-term benefits of cutting back just a little bit.
When you're ready to retire, will you really care about going out to dinner this weekend? Maybe, but maybe not. But, you will be happy if you decide to eat in one extra night and invest that money for your future instead.
