When discussing personal finances with people, particularly the savings side of the equation, the focus is always on just that. What percentage of your salary are you saving? Here we’re focusing on long-term retirement savings. The ideal number is probably somewhere around 15%-20%, but that depends on your age and how long you have left until you need your retirement savings. More if you start later and less if you start young.
But there are two sides to the equation: saving on the one side and spending on the other. A third consideration would be income, but that’s a different conversation.
So, spending. And no, I’m not going to trot out the old story about needing a budget (you do, but you know that).
What we spend matters.
Say we have two people each earning R100,000 a year. One spends 80% of their salary every year and saves the rest. When they hit retirement — and we’ll pretend there is no inflation so the maths is easier — they’ll need about 75% of their current spending money to survive, so R600,000 a year from their retirement savings.
But what if the second person spends only half of their income every year? This means they’re spending R500,000 a year, and so at retirement they’ll need only R375,000 a year for living (75% of the R500,000 they currently spend).
Two things have happened to the person spending less. First, they need less money in retirement because they simply spend less every year.
The other and even more powerful point is that they have been saving 2½ times more money than the person spending 80% a year. So they will have a significantly larger pile of money when they get to retirement.
This presents several scenarios. First, they could have a wild retirement, boosting spending much higher and living the high life. Second, they could live as they always have and leave a large pile of money to their heirs. Third, the odds of running out of money in retirement (especially if one lives to a very old age) is greatly reduced.
There is also a final important point. They could retire earlier because they have spent less and so need less with a larger pile of retirement savings.
Managing and reducing spending is hard, but there are many tricks we can use
Of course, managing and reducing spending is hard but there are many tricks we can use to do that.
Scale down your car, which almost certainly is funded via a loan. Just buy down. Not drastically, but maybe buy one model lower. Reduce the size of your home. Maybe no pool or one less room? Or perhaps a little further out of town, all potentially making for a cheaper house and hence home loan.
Smallish tweaks can cut spending, increase savings and seriously boost your retirement, or give you the chance to retire early with enough money to live on.
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