It isn’t news to anyone that people generally put a higher priority on the present than they do retirement. The concept of delayed gratification is an easy lesson to learn but it can be hard to put into effect. Thus, living in-the-now typically leads to rampant consumerism, and debt that lasts seemingly forever.
Most people don’t even realize this is happening to them. They think that the lifestyles they’re leading are normal. And they are, but that’s the main part of the problem.
For this article, I’d like us all to peer into the window of the typical Middle Class American family. First, we’ll learn a little bit about the family, then we’ll delve into their spending habits.
The family is comprised of:
- Parents who are both college graduates
- Parents who are both employed
- Household after-tax income: $80,300
- They have two children
The Typical Spending Scenario
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Consumer Debts
- $11,232 (car payments)
- $6,700 (student loans)
- $2,556 (credit card payments)
Mortgage/Rent
- $14,400 (whether it’s a mortgage or rental doesn’t matter)
Consumer Spending
- $10,440 (groceries)
- $2,084 (movies, general shopping, presents)
- $3,731 (gasoline)
- $5,010 (eating out)
- $4,000 (vacation)
- $750 (coffee)
Retirement Savings
- $5,460 (401k)
Health/Car Insurance
- $4,316 (healthcare)
- $3,592 (car insurance)
Utilities
- $2,452 (cell phone)
- $1,347 (electricity)
- $1,200 (water + internet)
- $1,030 (cable)
And that’s how the typical Middle Class family spends their $80,300. It’s apparent, looking at the above pie chart, where the family’s money is going.
About a quarter of it is going to debts (ie, things that were purchased in the past). And nearly a third is being spent on day-to-day items, like gas, groceries and going out to eat. Less than 10% is being saved, which is going to provide a less than optimal retirement around after a 45-year working career.
You know this family. They’re the people you work with that tell you there’s no way they can save money. They say things like “you don’t understand”. They are in complete denial about their spending habits, and tend to make excuses rather than actions.
Without ever earning any more money per year, could this family get out of debt? More importantly, could the parents eventually retire early?
The Shift-to-Debt Scenario
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The good thing about our Middle Class family is that they actually make MORE THAN ENOUGH money to not only pay their bills, but also to live a luxurious lifestyle, while paying off their debts.
What can they do to reduce their annual financial burden?
I’m not going to try to convince anyone that they have to move. Spending less than 20% of your income on housing is fine. We’ll be able to squeeze money out of a few other areas instead.
The largest affected area in the shift-to-debt scenario is Consumer Spending. We’re going to cut it down to less than half of what was being spent before.
- Groceries: $6,000 – $500 is enough to feed a family of four, high quality, delicious meals from a grocery store every month.
- General Spending: $400 — Avoid the mall. Shop at thrift stores whenever possible. Wait until movies come out on RedBox or Netflix. Make creative, low-cost gifts for people.
- Gasoline: $1,560 — Carpooling, living close to work, occasionally riding bicycles, using public transit, and avoiding aimless driving will all help curb this spending.
- Eating out: $1,200 — You’re in debt. Why are you financing eating out? $100/month maximum, and that’s pushing it.
- Vacations: $2,000 — It’s not all work and no play. But, when choosing getaway destinations, avoid tourist traps, cruises, etc.
- Coffee: $180 — Two bags of coffee per month run about $15. Equivalent spending at a coffee shop is fine, just as long as it isn’t in addition to at-home drinking.
Areas in this scenario that are completely unaffected include: Retirement Savings and Insurance payments.
I wouldn’t recommend that they stop contributing to their 401k ever — especially if there’s a company match. Insurance payments will not decrease until the vehicles are paid off. Once they are paid off, we’ll be able to strip all unnecessary coverage for additional savings.
Reductions WILL be made to utility spending, which shouldn’t have an impact on quality of life (besides freeing up more money).
- Cell phones: $600 — Switching to a reliable, contract-free, cell phone provider like Republic Wireless. They charge $25/month per phone for unlimited call/text/data.
- Electricity: $600 — Install CFLs/LEDs instead of incandescent bulbs. Use power strips to easily cut power to not-in-use items. Install a programmable thermostat to reduce/raise the temperature when you’re sleeping or out of the house. Call the electric company and find out how to utilize every savings program possible.
- Water/Internet: $700 — I just switched from Verizon FioS to a local broadband provider. Our current payment is now around $25/month. To reduce water usage you should install low-flow shower heads, aerators on sinks, and low-usage flushing mechanisms on toilets.
- Cable: $192 — Well it’s not really cable, but it’s good enough. Netflix and Hulu are $16/month total. They account for hundreds of hours of entertainment in my household.
All of the extra money that we cut out of the annual spending plan is now going towards debt. With nearly 50% or $40,000 going toward debt, it will be paid off within a two year period. At which point, the family can switch gears and begin the Early Retirement Savings Scenario.
The Early Retirement Savings Scenario
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This family has come a long way. They started as general consumers. They seemed hopeless. They regarded savings as impossible. Now, they’re finally living the First Class lifestyle.
When the family pays off their debt, all former debt payments are going to be shifted towards retirement savings. Not much else has changed between this chart and the previous one.
The only thing that we were able to implement was the reduction from full-comprehensive insurance down to liability only on both automobiles. Since they’re no longer financed, and we have a significant amount of money going towards savings, we are able to provide our own form of insurance.
Without any further adjustment, or pay increases — using the super easy early retirement calculation — we’re able to see that the parents will be able to retire from full time employment within 12.5 years. This is pretty incredible. They were able to go from indebted to retirement within the span of 15 years.
Since this doesn’t account for pay raises, or tax-returns, our new-and-improved not-so-typical family could very well retire well before the 10 year mark.
Now imagine this scenario was you.
What are the excuses that keep the average Middle Class family from socking away hundreds of thousands of dollars every few years? Are they legitimate or are they trying to live a lifestyle that should be deemed as excessive and consumption-driven?
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