Friday, May 20, 2016

300 reasons to care about a single dollar

I don't know about you, but for me, high-cost items are something I buy once (maybe only a few times), whereas thing that cost a few dollars a piece are things I tend to buy over and over again.  Back in 2002, I spent something like $16K for the car we still have, but my few-bucks-at-a-time milk and yogurt purchases happen basically every week.

Which is why I tend to be fairly blasé about big purchases, and fairly obsessed about seemingly small, on-going trends.

Here's the way I think about these numbers in my head: one dollar per month is the same as three hundred dollars in a retirement fund.

It's a fairly standard rule of thumb to assume a 4% "safe withdrawal rate" during retirement.  The way retirement experts explain what this rule of thumb means is to say that people should aim to have about 25 times their annual expenses in retirement funds (after social security, pensions, etc). But I don't really think about my own expenses on an annual basis; I think about my expenses in monthly terms. I get paid monthly; the majority of our bills come once a month; I do our financial updates with my husband monthly, and my spreadsheets track our expenses monthly.  

So, the 4% rule translates to this:  for every dollar we want to spend each month in retirement, we need to have about $300 in our retirement funds.  And on the flip side: this means that if we can find ways to cut $1/month from our on-going expenses, I've just saved myself the burden of socking away $300 for the future.  That's a pretty big incentive to pay attention to small amounts.  

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