Recently I had a chance to have some fun with some of my undergraduate students. Polling my entire class I asked them to make a list of wants (not needs) that they frequently spent money on. Answers varied from smartphones (and the respective bill), cable and satellite TV, dining out, coffee shops, beverages (you know which ones), and appearance (spending extra to dye hair, pedicures, etc.).
Here’s a list of how each expense was broken down as told by the students. In other words, it was their numbers not mine.
- Smartphone bill – $150
- Cable/Satellite TV – $100
- Dining out – $150
- Coffee – $75
- Beverages – $200
- Appearance – $100
Keep in mind these were college students – not one had a full time job (many work part-time) and they are arguably on the low-end of the spectrum when it comes to annual income. That is, if they can do it, no one should have an excuse not to save.
Added together; these amounts sum to $775 monthly. That’s $9,300 annually. The maximum contribution to an IRA for 2015 is $5,500 and $6,500 for those aged 50 and over. In other words, these students could max out their annual IRA contribution and have an extra $3,800 left over to invest elsewhere.
The point is that if these college students can find the money, there should be no excuse for those of us making higher incomes than college undergrads to do the same. So how do you get started?
First, take a look at your last three months’ bank statements. This will give you a representative sample of where you’re spending your money. I recommend using past statements as keeping track of future expenditures will likely skew the data since you’ll be more apt to control your spending since you know you’re tracking it.
Once you have your statements simply itemize the wants from the needs. Be honest with yourself. Many people will argue they “need” their expensive smartphone or “need” TV. Force yourself to really determine true needs that you must have to live and survive and those expenditures that are really wants.
Now add the total wants expenditures for all three months and divide by three. Here’s your average monthly spending on wants. Now, simply transfer that spending to your IRA. Force yourself to avoid making excuses. In fact, put the monthly contribution to your IRA on autopilot and have it automatically deducted every month from your bank account and live off the rest.