Over the summer, I wrote a post about the basic math behind figuring out how much money you need invested in order to retire or become financially independent.
Essentially what it boils down to is this: multiply your annual expenses by 25, and voilà! You have your target number. This is because of something called the 4% rule and if you want to understand the why behind these numbers, go back and read that article (it’s linked below to make it easy for you).
How much money you need to be financially independent isn’t based on your income — it’s based on what you spend. Here’s why.
I’m bringing it up again because you can use those same principles in reverse to find out how much cutting a monthly or annual expense reduces the amount you need to save for retirement.
For example, let’s say I reviewed my past few month’s spending and found $100 worth of monthly expenses that I could cut. Cutting this $100 from my monthly budget means I now have to save $30,000 less for my retirement.
$100 per month x 12 months x 25 = $30,000
Knowing how much you’ll need to have saved in order to cover an existing expense in retirement can be helpful when making those decisions on what to cut. (You can use the same formula above to figure out how much you’ll need to save to cover any monthly or annual expense in retirement.)
In 2019, the average cable bill in the U.S. was $85 per month. That means to keep cable service in your retirement, you’d need to save an extra $25,500 in order to cover that monthly cost. Meaning that one bill could add a year – or a few – to your working career based on how much you save each year.
Seeing these monthly bills associated with such high numbers might make you feel overwhelmed at first, but I think it can also have a sort of freeing feeling that allows you to feel more in control.
Just like a $100 monthly cost requires you to save $30,000, it’s flipped as well. By finding a way to shave $100 off your monthly spending, you’re cutting your savings target by $30,000 just with that one move.
By opting for a house with a mortgage payment or rent that’s $200 less per month than you currently pay, you reduce your savings target by $60,000. By choosing to save up and buy a used car with cash instead of financing the latest model, you could easily save $400 a month in car payments, reducing your target savings by $120,000.
Don’t go wild and cut everything out just for the sake of reducing that number though. Keep the things that you really enjoy, the things that you value and find meaningful, and the things you don’t mind trading some of your time for. With everything else, get creative and think critically if that extra cost is worth it.
So this week, here’s what I want to know:
- What is one monthly expense you think you could cut?
- How much less do you have to save because of making this cut?
Leave me a comment and let me know what expenses you’ve opted to drop!