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Today’s episode is called “Spending, Saving and Investing for Retirement.” You’re going to learn why you want to start saving for retirement the moment you have income and why it should be higher on your priority list than it might be.

Last episode I was talking about spending priorities and I gave you my list of 10 spending priorities. Spending priorities are a way for you to decrease impulse spending and really focus on matching your money with your priorities. If you know where you want to spend money, you’ll be less tempted by purchases that are thousands of dollars and totally unplanned. Don’t get me wrong, I’m NOT a fan of budgets, unless you have a very limited income and must watch every penny. But for people who have excess money every month, I think budgeting can feel like a diet – too restrictive, you want to go off it as soon as it starts and it may give you a bad relationship with money because you always feel guilty when you spend.

Rather, I think you should have spending priorities and be very clear on what they are because then you are matching your money with what matters most to you. What matters most HAS to include retirement savings from the time you begin to earn income. Ten percent (10%) into a retirement plan and ten percent (10%) into savings (so it’s available as an emergency fund and for more investments outside of your retirement plan), will get you on the path to building wealth and having a comfortable retirement.

I purposely put retirement high on the list, perhaps higher than you might expect because it IS so important to start saving and investing EARLY, because if you start early, you can even make mistakes or encounter a bad period in the stock market and likely come out ok. It’s also easier to be successful, the more years you have to compound money, so starting early is key. It’s not too late if you’re getting a late start, just START!

To review, here is my list of your 10 spending priorities:

1. Home/shelter
2. Food
3. Kids
4. Retirement savings
5. College savings
6. Transportation
7. Utilities
8. Insurance
9. Clothing
10. Entertainment

These are the 10 basic expenses everyone has. If you don’t have children, then obviously the categories of kids and college don’t apply to you, but everything else does. Notice I didn’t put elective items like “travel” on the list, because it’s elective. These are the 10 basic things you pretty much have to spend money on.

From here you want to include the things that really matter to you. If you didn’t listen to the last episode that talks about this in detail, I encourage you to go there and get the backstory.

Retirement is a function of saving, investing and compounding. Those three things are what create your retirement fund. It’s very difficult to just “save” your way to retirement, you need to invest because you need higher compounding rates to get you to your retirement goals.

For example, if you have $150,000 in your retirement plan and 25 years until retirement, having your money in a savings account at 1% for 25 years is only going to grow it to $192,364. However, if you can earn 8% in the stock market for 25 years, then it will grow to $1,027,271. That’s a $834,907 difference! Notice, you didn’t save more, you just invested better. That’s it. So investing well is key to your retirement, but so is being smart with how you prioritize spending your money, so you can save money to invest in the first place!

To do that, you must have retirement high on your list, so you get enough into your retirement account to be able to invest it! That’s why I have it #4 on the list! It can’t be an afterthought that you start to work on after you have saved for everything else and I definitely disagree with the idea that you should pay off your house first before saving for retirement! What a HUGE mistake that can be! Pay off a debt that’s only at 4% interest and not start investing until after it’s paid off? I don’t agree with that idea AT ALL.

You’re paying off cheap debt and delaying your investment savings, making you start later to begin compounding for retirement. Let’s look at what that would do to your $1 million retirement account. If you started investing 10 years later, had the same $150,000 to start with and earned the same 8% in the stock market, instead of over $1 million in your retirement account, you’ll have only $475,825 – about HALF of what you would have had if you started 10 years earlier!

So again, I wanted to make the point of why your retirement fund is higher on the priority list than you may have heard from other experts and than you may have put it yourself. It’s crucial to start as early as possible and to invest well. The earlier you start, the easier it will be. But put it off and let impulse spending get the best of you, well, it’s going to really set back your retirement and you don’t want to do that.

Here’s your action plan for this week:

1. Go through my priority spending list and use it as a reference to determine how much you’re going to save monthly into your retirement plan. I recommend 10% into your retirement plan and 10% into savings outside of your retirement plan, for a total of 20% savings.

2. Get rid of large items that you don’t use anymore – sell the motorcycle, the Italian bike, the timeshare, the extra car and put that into your retirement plan or savings account or both.

3. Be conscious of where you’ve been tempted to spend impulsively. Re-examine your priorities, determine that retirement is higher on your list and get more money into it as soon as possible!

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Related posts:

1. 142: 6 Ways to Have More Money at the End of the Month
2. 340: How to Stop Spending Unconsciously
3. 395: Wealth is a Choice

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