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How to Double Your Retirement Savings (Get Out of Debt Now!)

Take a look at the “budget” below:

 A friend that works at an accounting firm shared this image from FinancialSamurai.com.  Checking out the article here my first impression was the title of the article: How to make Six Figures A Year and Still not Feel Rich – $200,000 Income Edition.  This “typical” family of three lives in San Francisco, notably one, if not the, highest cost of living cities in the U.S.  The theme of this article is that a family can survive on a $200K yearly incomebut not get to the point of ever feeling “Rich.”

This “typical” family is saving 9% for retirement annually, which isn’t terrible.  Actually, it’s above average, which is estimated at6.4%.  But this family could do much better.  But before we get to that, let’s look at their spending.

The biggest number that stands out to me is their mortgage at $36K annually, or $3K per month.  According to the article, this couple put down $160K and took out a $640K mortgage at 3.75%.  Roughly 2/3 of the payment is interest payments.  At the end of 30 years, this couple would pay $1,067,018.27 for that $640K loan.  According to the article, and also one of the greatest finance myths out there, the author states this is not a problem, because the mortgage interest deduction they get to take on the $25,200 this couple paid to the bank in annual interest.  Let’s do some math (yuk, I know): $25,200 x 30% tax bracket = $7560 tax deduction.  Most of you will say that is awesome! $7500 back from the tax man; I’ll take it!  But look closer: You would rather send $25,200 to the bank to save $7560 on your taxes.  That means you still paid out $17,640 ($25,200 – $7560) to the bank.  If your house was paid for, guess what?  You would only have paid the tax man the $7560, but you get to keep the money you would have sent to the bank: an extra $17,640 in your pocket!  This couple could double their retirement savings just by having a paid for house!  18% saved per year is a lot better than 9%, just saying. 

Most people think a paid for house is impossible, unless you have paid down the mortgage over the course of the 30 year loan.  But it is far from impossible.  It takes focus and fiscal discipline to take whatever extra money you have or what you can earn through selling unused stuff to finding extra jobs.  Or here is something that most people don’t want to hear: move to a cheaper city.  But I love ____ (insert metropolitan city with inflated cost of living here).  I hope you also love being in debt as well.  I get it, an $800K house in San Francisco probably doesn’t buy much.  But in Greenville, SC?  You could have the same house in Greenville for around $150K, and now you have $650K remaining for investing, travelling, and getting your financial future set for life.

Don’t want to move?  Fine.  Then let’s look at this budget again to see where we can cut costs to free your life from debt.  The next largest number on this budget is $24K per year for childcare.  I would assume this couple works full time if they are paying $2000 per month for one child.  Beyond shopping around for cheaper daycare, there isn’t much to do about this cost until the little one becomes old enough to go to public school *gasp!*  But little Johnny needs to go to this ivy league kindergarten or he will never get in to Harvard!  I promise you, your kid will turn out just fine if you send him or her to public school.  Tens of millions of kids have attended public schools in this country over the last century and the vast majority of them have gone on to live successful lives.  Don’t put your own financial future in jeopardy because you think your 5 year old needs a bogus ivy league education.  So that saves this family an additional $24K per year.

The next largest charge is $12K per year for food, or $1000 a month.  Are they eating steak and lobster every night?  Maybe going out to eat several times a week because, hey, San Fran has the hippest restaurants in the country!  My family of 3 lives very comfortably on $500 per month, and I believe that number is too high.  And no, we don’t eat ramen noodles or beans and rice every night.  We shop at Publix and Fresh Market, but we are also satisfied with shopping at Walmart Superstore.  Once you learn to cook great tasting food you find you don’t need to spend tons of money for groceries.  And an added bonus, cooking together as a family is a great bonding experience.  So now we just cut out another $6000 per year from this budget.

Next budget item: $8000 for 2 vacations per year.  Now I am not against vacations, but when you are in debt this is a luxury, not a necessity.  If you really want to go on vacation while you are in debt (which I don’t recommend), then go visit friends and family.  You can significantly cut down on costs by staying at their house and help them cook at home.  Just throw them some money at the end of the vacation to help cover eating their food and drinking their beer, and they will appreciate your company.  Or another idea: a stay-cation that you take time off work and explore your own city.  Hell, this couple lives in San Francisco!  There is so much to see in their own city; much of it free.  Visit parks and museums, and then come home each day to your own house.  Let family come visit you and play tour guide to explore your city through their eyes.  Plus if they throw some money your way for food and drinks, you might not be out of pocket too much.  This expense can be reduced easily to $2000 per year, saving an additional $6000 per year.  Once you are out of debt and rolling in money, then you can take whatever exquisite over the top vacations you want for the rest of your life.  For now, it’s time to buckle down.

Two final areas of this budget I will cover: Consumer debt ($3000 per year) and car payment ($6000 per year).  First, this family is doing much better than average with consumer debt.  The average family has $15,000 in credit card debt over 8 credit cards.  So they are doing ok.  But look at the What’s Left category: $5700 in cash remaining per year.  If this family has cash, why are they spending on credit cards?  Life is so much simpler when you budget for what you want or need and pay cash for it.  Charging your credit card to build up points or rewards is another myth, and I will cover that in another blog post.  So let’s wipe out the consumer debt and we will still have $2700 remaining.  As for the car, this family is paying $500 per month in car payments, which is about average ($482 per month for a $33,000 vehicle).  I assume this is for only one car, and we know from the child care that this couple both works full time.  Which means they either have a second car paid for, one person commutes to work, or they both ride together.  I suspect with their gas at $400 per month, they operate two cars so one must be paid for.  If this couple sells this car and drives the one paid for car, they can cut their car payments completely, and possibly cut their gas in half as well, saving a total of $8400 per year ($6000 car payment and $2400 in gas annually). 

So let’s add all of this up.  Assuming this couple does not move from San Fran and so they maintain their mortgage, but make all of the other cuts described above, they could save an additional $50,100 per year, or 1/4 of their income!  Bulls*#t you say?  Look at the numbers: $24,000 for childcare + $6000 food + $6000 vacations + $8400 car/gas + $3000 consumer debt = $47,400 + money remaining at end of year ($2700 after paying off consumer debt) = $50,100. 

Since this couple is used to spending this money anyways, they could pretend the money is already spent, and put it allocated it to set up their family for a brighter financial future.  How you may ask?  This is how I would do it: Increase their retirement contributions from 9% to 15% (from $18K per year to $30K).  Also, start saving immediately for their child’s college fund in a 529 plan.  Just saving even $300 per month at 10% growth, this couple could save $180,000 for their child’s college over 18 years.  Total from the $50,100 invested is $15,600 ($12K additional to retirement and $3600 per year for college fund).  This leaves $34500 remaining.  Woohoo, time for a vacation, right?  Nope.  Put this money extra towards paying down the mortgage.  Why?  This extra money on your mortgage reduces your loan from 30 years to being paid off in 11 years and 3 months.  Also, you pay $784,770.54 for that $640,000 mortgage instead of the $1,067,018.27 you would have paid over 30 years, saving  19 years of payments and $282,247.73 in interest. 

Want to learn more?  Or do you want someone to take a look at your own financial picture and how to better your future?  Contact a financial coach at Money Warrior for a free initial checkup.  Or find a financial advisor near you on Google.  Just do something now to better your financial future.