We live in a culture where daily spending on little things such as a morning bagel, energy drink, coffee, or afternoon snack is a very common thing amongst Americans. Throughout the years, we have heard that we should be saving the money we use on such purchases towards investments to better our retirement. Many still continue to buy their daily fix, but with some form of guilt, thinking they are sabotaging their savings for the future.
However, this really isn’t the case.
The problem typically tends to be that so many people are honing in on scrimping on such minor spending, but often overlook the big purchases. It is much more crucial to pay attention to the larger expenses and how to consistently contribute towards your retirement savings.
Unless you’re one of the many Americans that survive paycheck to paycheck, buying that daily fix of joy in the form of a coffee or an avocado toast is not that big of a deal. On the other hand, putting yourself in a lot of debt to support some of your life’s decisions can definitely be a destructive blow to your financial goals. These significant financial decisions can include things such as credit cars, vehicles, some form of housing, and education.
Education. The average tuition for the 2019 to 2020 school year was around $37,000 for studying at a private college. Those that went out of state to study at a public university had an average tuition of around $27,000. This doesn’t even include school supplies and housing, which can be around $12,000 more toward educational expenses.
And those looking to continue on for their bachelor’s or master’s degrees end up facing more expenses in the long run.
Though receiving an education can be quite crucial for many to achieve their career or life goals, it is also very important to ensure what kind of consequences these choices will affect their finances. Higher education should assist people to increase their income; it should not encumber their financial life. But the reality is that many educated and successful people are hundreds of dollars in debt due to their student loans, which they may only fully pay off just a few years shy from retiring.
For those that are considering higher education or have a child that is looking to go to college, it is very critical of how you perceive this move. Education should be seen as an investment decision. There are many people that end up is so much debt from pursuing their education without any plan or strategies on how to pay it back that it hinders their lives for a very long time–if not for the majority of their lives.
For many, it may be best to research and shop around for their next step in learning, as there are many affordable choices such as community colleges, in-state universities, certificate programs, or schools that have some form of financial assistance that is offered. Analyzing these options can help you stay on the right course for a successful career in your field while having manageable tuition that you can pay off quickly.
Housing. This is is a milestone that tends to be included in our culture. The typical price of purchasing a home is anywhere from a couple of hundred thousands of dollars to even a million-plus dollars.
Purchasing a house is usually the most significant expense a person will have. If something is the most expensive thing you will ever buy, you should definitely tread carefully and research thoroughly. Not only do you have to think about the initial costs of purchasing a home, but you must also consider and plan out what the yearly expenses will be with utilities, taxes, repairs, and other forms of maintenance.
Be sure that you don’t rush into this decision based on expectations of meeting a milestone. It may be a better choice to continue renting until you can genuinely afford to buy a house, or even purchase something more affordable until you can really buy that dream home you really desire.
Vehicles. Another significant expense is a vehicle. In today’s market, the average price of a new car is over $36,500, according to Edmonds, an automotive info page. Also, according to a study done by AAA, the average cost of owning a new car is over $9,000 when fuel, insurance, interest rates on loans, and maintenance are considered.
An average family typically has two vehicles, which double these expenses for many families.
To avoid going into massive amounts of debt, it may be wise to look for a vehicle that you can really afford. Instead of buying a luxury vehicle or a brand-spanking-new fully loaded ride, you may want to look into a practical and used car.
Be sure to view this purchase as a means to have a vehicle that will get you from place to place in a reliable manner. This is something that can be accomplished without destroying your budget.
Credit debt. Those that are not financially literate do not understand how much of a negative impact credit card debt can really have, especially when it comes to net worth. The debt can get out of hand very quickly if not handled correctly.
When a credit card is used correctly, it can be beneficial with perks of rewards, cashback, discounts, fraud protection, and racking up a healthy credit score. The first rule of thumb is that your credit balances should be paid off completely every single month.
If you do not have enough to buy something, putting yourself in the situation where you end up with credit debt is never the right answer.
According to the St. Louis Federal Reserve, the average credit card interest rate in America is almost 17%. That is a lot of money being added on top of the debt you have racked up on your cards, which can quickly have you upside down and in trouble.
Automated Savings. A critical step to saving consistently and effectively is to make sure that you prioritize allocating money towards your savings before doing anything else with your earnings.
A savings strategy for the long-term is much more effective with nudges, which is a theory on influencing how a person behaves that was made famous by economist Richard Thaler, a Nobel Prize winner, and Harvard Law Professor Cass Sunstein. This is done by making things easier for people to make certain choices.
One very common type of nudge that is in practice is when an employer automatically registers their newcomers into the workplace’s 401(k). People can choose to pull out of the plan if they wish to, but usually, most of them continue to be in the plan and contribute to their savings plan. Another popular nudge is automatically increasing the rate of savings every year on an employee’s account. This nudge encourages those that do not max out their contribution limit to their 401(k) to slowly move towards that direction. If the individual does not opt-out or change this option, they will continue to save more and more as time goes on.
Another nudge is to have a default option for investing with the money that is contributed to the account. To ensure they make a well-rounded investment. A majority of those that are not financially literate will either leave their money sitting in the account or will invest the money into funds that are not the wisest choices. Two options tend to be the default, which is a balanced fund between bonds and stock, or a target-date fund that is based on the age of the participant.
Though there are financial experts that believe that these funds are too basic without many options to customize or they may have other issues with these types of funds, still, their options keep things simple for the participant, which can encourage them to keep it at the default and to keep them from making any terrible investment choices.
Trying to stop yourself from having a daily treat will not make a considerable difference in reaching your retirement savings goals. Some actually see that the daily treat you allow yourself to have will let you enjoy life a little more as you make significant savings from making judicious choices on big purchases and debt that can really impact your finances.