Sanjib Saha
27 November 2022
I wrote about the true damage caused by misspending. Let’s look at the other side of the same coin. Each dollar that you managed to cut back from your expenses goes a lot further than you think. How? Because retirement dollars can be cheap to buy when you’re many years away from it. You get a large discount –the time value of money.
But if are able to stop a recurring expense – be it the annual gym payments because you chose to pick up health activities that you can do yourself, or the monthly savings you enjoy by switching from the unlimited data plan to pay-as-you-go one – that savings go a lot further. Your annual expenses went down, and so did your target for retirement fund. Not only can you put more towards your financial goals, but you also need a smaller nest-egg to retire.
Not convinced? Think about a recent cut back and use the following calculator to see the full extent of your savings.
Surprised? That’s the power of frugality and compounding. To be clear, this is not to say that you should stop spending altogether. Of course, you need to spend – now and later – otherwise what’s the point in earning money? But if you can cut back on things that you don’t need or care about, you can afford the things that you do care most.
Note: The calculator is based on annual compound-interest formula, using a 4% annual inflation-adjusted investment return until age 65. It also uses the 4% rule for retirement withdrawals. Because these numbers are based on oversimplified assumptions that may not be relevant in real world scenarios, they should be used as illustration only.