I know many of you are struggling just to pay your bills and can’t even imaging saving for an emergency fund or retirement. You might have resigned yourself to never having savings.
But it is possible to save, even if it seems like you don’t have any extra money.
There are many options for cutting those monthly bills and earning extra money, but we’ll focus on those in future posts. Today we’re going to look at a technique that will allow you to save without lowering your expenses or earning extra money.
If it’s too overwhelming to even consider putting any of your income towards savings, don’t do it right now. Instead, make a decision that you’re going to put away half of any future raises, bonuses, and tax refunds. This way, you still get to use half of any increases in income towards both luxuries and necessities, but you’ll eventually be putting away a substantial amount of money. You’ll be amazed by how quickly it adds up!
How it Works
I’ll break the math down for you a bit. Let’s say you are part of a family of 4, and that your household income is $50,000 a year. It’s definitely difficult to provide for a family of 4 on this income, but it is about average.
Let’s further assume that the worker or workers in the family receive an average raise of 4% raise per year, and that they get a $2,000 tax refund the first year, and that the tax refund increases by 4% per year. We’ll assume that they don’t get any bonuses, although many people do receive at least a few bonuses throughout the years.
The first year you don’t save any of your income, but save $1,000 of your tax refund. After the first year, you receive a 4% raise, bringing your income to $52,000 per year. Your tax refund goes up to $2,163. You save half of this $2,000 raise and half of your tax refund, which will give you $2,121 more in savings.
Believe it or not, at the end of 30 years, your household income will be at about $156,000 per year. Not accounting for compound interest, your total savings will be at $109,051. But if you consider the powers of compound interest, the picture improves considerably.
Let’s say that you invested all of those savings in a low-fee index fund that had after-inflation refunds of 8% per year. This is definitely possible if you look at the performance of the stock market over the past 50 years. Better yet, let’s say you put those savings in such an index fund through a Roth IRA. This way, you won’t pay any taxes when you withdraw the money.
If you invested the savings in an index fund earning an 8% return, you would have $325,557 at the end of 30 years. Not a bad retirement fund, especially when you add it to your Social Security income.
And remember, this $325k is available to those making a modest $50k household income, and it won’t cause any pain right now. You’ll just be putting away half of future raises and tax refunds.
As I said previously, these numbers are great, but it would be even better if you could accelerate your savings by cutting your expenses and earning more money. However, hopefully this post has shown you that you can save even without doing either of those things.