I’m not entirely sure how I ended up looking back at Mr. Money Mustache’s old post: A Millionaire is Made Ten Bucks at a Time, but the post struck me recently, and I wanted to expand on his idea here.
People often look at the nest egg necessary for retirement and get easily discouraged. We’re here telling you to shave off relatively small amounts from your spending: A few bucks here, $20 there. That’s great, but don’t I need to end up with millions of dollars to be able to retire? Well, I think there are plenty of resources out there to show you that the numbers that banks and financial advisors give you are inflated quite a bit. (I use ING as my savings account, but they used to run TV ads that showed people carrying around their “number” which always was more than a million dollars). So, I think the issue here is at both ends of the spectrum. People think they need much more than they might actually require to retire; and people underestimate the value of small changes to their expenses.
Why should you respect your tens? Because in the long view, saving $10 actually means shaving $3,000 off of your nest egg!
Here’s the simple math: The standard rule of thumb for retirement withdrawal rates is 4%. So, for every $100 you save, you can withdraw $4 annually. Let’s do that math in reverse: for every $10 in income per year, you need $250. But wait, what if that’s a recurring monthly expense? That’s means we’ll actually need $120 per year, which comes out to needing $3,000 in your nest egg! Whoa! No wonder why banks are always throwing huge numbers at you!
When I get discouraged about making small dents in my expenses I like to turn my math around and remember the “300 multiplier”. If I can switch gyms and save $25/month, I’m actually reducing my necessary nest egg by $7,500. Not only that, but I now have $25/month to save, pay down debt, invest and generally grow. At that point, it’s just a matter of using the magic of compound interest to my advantage. If I start early (say 22) and plan to retire young (say 40), that means I can turn that $25/month into $9,570 in those 18 years at 6%. So here we’ve reduced our necessary nest egg by $7,500, and grew the money to be $9,570. A simple change in gyms to save $25 a month has swung my numbers for retirement by $17,070! If I didn’t intend to retire until later than that, the swing would be even larger. Make a change like this at 22 and work until you’re 55? That’s a difference of $37,644.
Small amounts don’t look like chump change anymore, huh?