How to save $1 million without trying
It鈥檚 no secret that Americans need to save more. The issue 鈥� at least in part 鈥� is that saving requires sacrificing some of today鈥檚 wants in favor of tomorrow鈥檚 needs.
A recent聽聽shows an alternative approach: Saving future income. According to the research, a 25-year-old earning $45,000 could accumulate nearly $1 million by investing modest raises and bonuses over the course of her career.
That鈥檚 either a retirement nest egg or a very healthy start to one, depending on your lifestyle.
Avoid lifestyle creep
When you start making more money, you鈥檙e likely to start spending more, using the extra income to eat out twice a week instead of once, for example, or to trade up to a new car.
After a while, it鈥檚 hard to remember a time when you drove a clunker or cooked for yourself on a Saturday night. As each raise continues to build on the next, you become accustomed to an increasingly higher standard of living.
In a聽聽of households earning $75,000 or more, close to half reported lifestyle spending as the culprit of their savings shortfalls.
鈥淣o one ever has enough,鈥� says Daniel Sheehan, a financial planner in Fresno, California. 鈥淲hen people get a raise or bonus, they look at that as an opportunity to do whatever they weren鈥檛 able to do before.鈥�
Split the difference
Inflation 鈥� tempered as it has been 鈥� is a very real thing, as is the need to treat yourself. But a raise is also the easiest way to hit savings goals. The NerdWallet analysis struck a compromise, using just half of every raise but all of each annual bonus. The $1 million outcome is based on聽, 5% annual bonuses and a 7.5% investment return.
Someone who doesn鈥檛 earn bonuses but still saves half of each year鈥檚 raise would still accumulate over $223,000 by age 65; undeniably a worthwhile boost to any retirement fund.
The analysis found that college savings goals can be achieved by parents in much the same way: A 35-year-old who earns $55,000 and saves half of his raises and all of his bonuses over 18 years would end up with $147,337, even accounting for a more risk-averse return of 6.5%.
Hit short-term goals, too
For short-term goals, you want to get further, faster. To do that, you can give your savings a much bigger boost by continuing to put away what you were saving during the past year, and increasing that by this year鈥檚 raise.
Using that method and adding in bonuses, someone with a $45,000 salary could build over $22,000 in five years, even at the 1% interest rate paid by an online savings account. That鈥檚 a healthy emergency fund for many people, or several steps toward a home downpayment.
Give yourself a raise
If the idea of a raise feels like a foreign concept, it聽. But if your boss says no, you can use other windfalls the same way.
This time of year, that might mean saving a tax refund, says Linda Jacob, a financial planner in Johnston, Iowa. 鈥淚鈥檓 always telling my clients to make a plan for that money before it actually hits your account.鈥� Then, she adds, change your withholding so the money lands in your paycheck over the next year, functioning just like a raise. If your goal is saving for retirement, you can use it to boost your 401(k) contribution, or set up automatic transfers聽.
Changes to your monthly expenses can be treated the same way: When you pay off a debt, like a car or student loan, put the money you were using to pay the loan each month toward your savings goals rather than absorbing it into your discretionary spending.
All of these suggestions provide a way to save without cutting expenses. But here鈥檚 the thing about saving money: After a while, as the balance starts to grow, adding to it can be a little addicting. You might find yourself wanting to save more. At that point, cutting back here or there may no longer feel like such a hardship.
Arielle O鈥橲hea is a staff writer at NerdWallet, a personal finance website. Email:aoshea@nerdwallet.com. Twitter:聽.
This article was written by NerdWallet and was originally published by聽.
