How often do you spend $5 and think, “oh it doesn’t matter, it is just five bucks?” Pretty often I bet, I know I do it often! Your financial life has two main components, the big purchases like furniture, technology, or car, and the smaller everyday spending habits you naturally fall into. By making sustainable small changes, you can accelerate your growing wealth. Let’s see an example of how small changes can make a big impact on your wealth.
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What is the big deal about small changes?
The key to making these small changes is to know your values and only cut out or reduce your spending on things that are not important or less important to you. If your main hobby is playing video games online, then don’t skimp on your Wifi costs. Choose to cut out cable instead.
Secondly, you have to take your savings from these changes and put them to work. Don’t just leave them in your checking account, because they will get spent without realizing it. Instead, for every savings you make, set up an automatic transfer to either your retirement account, debt repayment, or goal-based savings account so that money starts working to build wealth for you.
My friend Jenn and I recently were talking and she was complaining about how she wanted to start saving for retirement in an IRA but didn’t have any extra money each month to make a contribution. She felt stuck.
Jenn and I chatted about some solutions and I asked her if I could share her situation (anonymously) here with y’all so we could all learn about this together. She agreed, so let’s dive in and see if we can get Jenn some retirement savings!
Jenn’s background
A little background to get us started. Jenn is 26 years old. She graduated from a state university with a bachelor’s in Marketing/Advertising and has about $15,000 of student loans left to pay off at a low-interest rate. She is on track to pay these loans off in 6 years making an extra $150 a month in loan payments.
For work, Jenn is a Social Media/Marketing employee for a regional construction company making $50,000 a year and has been working there for about two years. When she was hired, her company automatically enrolled her in their 401(k) to contribute the match amount of 3% (the match is also 3%). So she is contributing $1,500 each year and receiving an employer match of $1,500 to her retirement account.
Jenn has no other debt besides her student loans. She has a close group of friends in her town and spends much of her free time hanging out with them. Currently, Jenn is renting a 1 bedroom apartment but may want to buy a home in the future.
Growing up she watched her grandparents work physical jobs well into their 70’s because they couldn’t afford to retire. Jenn is really concerned that could be her future and wants to make sure that she is saving for retirement.
Find Jenn some savings!
Jenn and I spent about an hour looking at her spending for the last few months and talking about what she values with her spending. We came to the following conclusions:
- She rarely watches her cable package and would be willing to cut that cost out of her budget.
- She gets coffee every morning on her way to work, mainly as a habit. But she has a coffee maker at home and likes that coffee just as much so it would be something she would consider switching.
- She was shocked at the amount of money spent each month on dining out. It added up to $950 a month when looking at coffee, lunches, and dinners. Jenn really values spending time with friends and going out, but finds herself getting takeout alone most nights. Cooking at home is an area she would like to work on improving.
- Jenn has been a customer of her car insurance policy since she was in college. She would be willing to get some quotes from other companies and see if she could reduce the monthly cost.
There may be more savings to look at in the future, but these four tasks seemed like a good starting point to make some serious savings, without being overwhelming or too much of a tightwad! These are just a few examples of how small changes can make a big impact.
How much can we save?
Cutting Cable
Jenn is paying $49.95 per month for a basic cable package. Additionally, she has subscriptions to Netflix, Amazon Prime, and Disney+ that she wants to keep. She called and canceled the cable subscription, saving $50 a month. An unexpected bonus, to retain her as a customer, they also gave her a discount on her internet saving $20 a month for 1 year!
Monthly savings to go towards retirement $50.
Coffee
I firmly believe you should have occasional treats to help you through the monotony of life, and coffee is definitely one of those occasional treats!
After talking about it, Jenn decided that she would bring coffee from home four days a week, and then stop at her favorite local coffee shop for a treat one day a week. Calculating the savings from this change, we are looking at a savings of $5 per coffee, four days a week which totals an $80 savings for the month.
Monthly savings to go towards retirement $80.
Dinner at home
Jenn really values the time that she spends with friends, and that includes eating out together once or twice a week. Knowing this, we needed to make sure there was enough flex in her plan to allow her to say yes to dinner invitations.
Jenn thought that eating four dinner meals a week at home was a good balance for her. Looking at her expenses, she is averaging about $20 per takeout meal so four meals at home a week saves her $80 each week.
This small change will take a little more effort on Jenn’s part. She has a well-stocked kitchen with everything she needs to cook (thank you for the Graduation gift Mom and Dad!), but she doesn’t have much experience cooking. I recommended a few websites that focus on simple and budget-friendly dinner recipes like Budget Bytes, Damn Delicious, and Good Cheap Eats.
Monthly savings to go towards retirement $320.
Shopping around for car insurance
Jenn went online and got a few quotes for her car insurance. She found a reliable company (GEICO) that was $600 cheaper a year for the same coverage, so she went ahead and switched to them.
It took her about two hours on a Saturday afternoon to get five quotes online and make the decision to switch. That is a pretty good reward for her time spent!
Monthly savings to go towards retirement $50.
Total monthly savings from four small changes $500.
This can be totaled up into one monthly transfer to her IRA account. A contribution of $500 a month will allow Jenn to contribute the full maximum of $6,000 per year! A great start to her retirement savings goal and a great example of how small changes can make a big impact!
How can $500 a month make you wealthy?
Time and compounding growth. Those two things together are incredibly powerful at growing money.
Jenn was adamant that she wanted to retire at 60. Watching her grandparents work so late in their life, left Jenn with a strong feeling that she wants to be able to enjoy her later years. With that information, we know that Jenn has a 34-year investment timeline.
I am making the same assumptions that I always use when doing a compound interest. The stock market has produced 10% annual returns on average over its life. This is the calculator I am using for this example.
If Jenn starts at $0 in her IRA, invests $6,000 every year and it grows at 10% for 34 years, her IRA balance will be $1,472,860 when she reaches the age of 60. She will have contributed $204,000 to it, and the remaining $1,200,000 is growth, dividends, and interest. That is a pretty healthy nest egg!
I didn’t specify this earlier, but if Jenn is making these contributions into a Roth IRA, then she will be able to withdraw this money tax-free in retirement.
What about Jenn’s 401(k)?
As you may remember, Jenn is also saving in her 401(k) at work. Currently, she is saving the match amount of 3% or $1,500 a year. Assuming her $50,000 wage doesn’t change, and she continues saving this amount plus her employer match, her 401(k) balance at age 60 will be $889,716. This 401(k) combined with her IRA gives Jenn over 2 million dollars at retirement to supplement the Social Security she will also get.
What if Jenn receives a 2% cost of living raise this year, and decides to increase her retirement savings by the full 2% to be a 5% contribution by her and a 3% employee match. This means that Jenn is now contributing $2,550 per year to her 401(k) and is still receiving the $1,530 free money match. Based on Jenn’s new $51,000 salary and all of the same assumptions her retirement balance at age 60 will be $1,154,830. That is a significant increase from the $890,000 in the original example by putting her small raise to work for her instead of spending it.
I know in the real world, her salary will continue to grow through merit raises and cost of living increases. The math is simpler to show when you are sticking with the same salary figure. If you want to play around with what would happen for Jenn if she had a 2% raise each year, then you can use a more detailed calculator like this.
See! Small changes can make a big impact!
I know I am a nerd and love to play with future value calculators, but I think you have a good idea of the picture I am painting.
These are all small life changes that when combined and allowed to grow are hugely impactful.
Small changes to your daily spending, when put to work invested for the long term in a retirement account, have a huge impact on your long-term wealth.
It is as simple as that. You can do exactly what Jenn and I did too. Take a look at your spending, identify a couple of areas that could be reduced, make the changes, and set up an automatic contribution to your retirement account for the amount saved. Set it and forget it!
So, I challenge you! What are one or two changes you can make and use that saved money to advance your way to greater wealth? I would love to hear about them in the comments below or over on our Instagram page!
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What a great information on saving! Thank you for sharing!
Such a refreshing post, I couldn’t agree more, by just making a few small changes and being consistent you can really make a big difference in your life.
Good luck on your changes and being consistent! Small changes over a long period of time have a huge impact!
Your blog really puts one’s finances into perspective. Never thought that these small changes could save one money in the long term. Very informative. Thanks for sharing 😊.
I am so glad that you found some useful information here!
I can’t tell you how much I needed this reminder. These are all very helpful tips, and I will most definitely try to cut down my expenses through this. Thank you for sharing x
I am so glad it was helpful and good luck with your changes!
Nice post 🙂
I definitely sometimes think “oh, it’s only …” and spend smaller amounts of money that then all adds up. It’s all too easy to do regularly and I need to make some changes so this was really helpful! This gave me some really good steps to take. Thanks!
This was such an incredible scenario to walk through. I definitely need to evaluate my priorities and cut down where I can! And this is such a good reminder before the holidays start too, thank you so much!