“Retirement” inherently makes you think about the future. Will you be healthy, enjoy your life, and have enough money?
Personally, I can’t look at my future without understanding where I am right now. My future is dependent on today. My future health is dependent on how I take care of myself today. My future income is dependent on what I save and spend today. In short, who we are today is the basis of who we will become tomorrow.
I realized that it is important to start where I am right now. I had to look at what I was spending now, and how that would impact my future. I dread the advice about saving $4 a day by not buying coffee, but I’m not a Starbucks addict so that’s not part of my daily expenditure. You need to focus on a financial impact that makes a difference, and you can do that by understanding your biggest, not your littlest, costs. Instead of the little expenses where you spend 1% of your money, understand where you spend 80% of your money. That is where you will have the biggest impact both today and tomorrow.
I harkened back to my Consulting days and remembered what we would recommend to companies to reduce their costs. I can’t ever remember advising large corporations to reduce the number of paper clips they bought. The biggest impact, the ideas that set them apart from their competition, were focused on the big processes and costs. If we had to focus on the little expenses those companies would have been closer to bankruptcy and not be employing Consultants to design their future.
To design your future, start where you are today. According to the Bureau of Labor Statistics, the average American spends over 80% of their income of five cost categories. Doesn’t it make sense that focusing on those big costs will have the biggest impact on today’s and tomorrow’s finances?
The costs that take up over 80% of your income are (BLS data):
- Housing – 31%
- Transportation – 18%
- Food – 13%
- Insurance and Retirement Savings- 13%
- Healthcare – 7%
I decided to radically reduce my expenses, so I took a deep look at these costs. My biggest expense by far was my housing. At the time, I owned a house, realized that I needed to earn over $50,000 a year just to support the house, and decided it was too much of a financial and emotional burden. I took a deep breath, called the realtor, and sold the house. I will have more blogs and information on what it was like to downsize, but reducing my housing costs by over 30% was both a financial and emotional relief.
Look at your biggest costs first and identify where you can reduce them. You will get a much bigger impact (and be less resentful) than if you immediately reduced your Starbucks budget. Consider these questions. Can you move to a lower cost area? Can you buy a cheaper car or pay off the car you have now? Can you reduce your grocery store costs by buying in bulk, starting a garden, are taking advantage of coupons and memberships? How about an insurance review for your car, home, and business? Attacking your largest costs are where you’re going to get your biggest savings and allow you to put that money towards retirement.