Are you spending more than you are saving? If so, you’ve got company — the average American spends beyond their means. If you continue to do so, you could find yourself in a jam during an emergency, or you may have to work well into your retirement years because you didn’t build a healthy enough nest egg. If you have savings goals, such as paying for a bachelor’s degree for your children and funding your retirement, you need to have control over your money and make sure that you are saving enough of it to reach your goals.
Korving & Company provides financial planning advice for clients in Suffolk and the surrounding Hampton Roads communities. Reach out to our team today to discuss your retirement goals, proper saving strategies, get estate planning guidance, and review all your financial needs. By meeting with a financial advisor, you can increase your confidence, discipline, and wealth.
Take the first step in managing your personal finances with the advisors at Korving & Company.
In the meantime, this article explores the question, “How much money does the average person spend in a lifetime?” Additionally, you’ll learn strategies to help you curb your spending and stash away more cash for your future.
Knowing how much the average American spends over the course of their life can help you better manage your money. However, keep in mind that the amount spent corresponds to how much is earned. Therefore, those in their 20s and 30s, who typically have not hit their peak earnings years, may spend less money than adults in their 40s and 50s when most people tend to advance in their career and income levels.
Factors that typically influence spending habits include your job, family size and dynamic, education level, and health. The average American spends between 40% to 50% more than they earn in a lifetime. You may wonder how that’s possible. Due to the easy availability of credit in America, it’s easy to overspend and live beyond your means. This is a huge problem.
If you’re like the average American, you’re likely to earn between $2 million to $6 million over the course of your working lifetime. When you’re able to retire and how you’re able to live in retirement will depend on the actions and steps you take right now in the decades leading up to your retirement.
The average annual income of all Americans is $51,480, according to the Bureau of Labor Statistics. So, for example, if we apply that average to a 24-year-old worker who has worked full-time since finishing high school (or perhaps landed a higher-paying job after college), they have probably earned over $300,000 thus far in their lifetime. Accounting for inflation and rising salaries, they’re very likely to double that amount by the time they turn 34. If they keep increasing their salary, they could earn over $800,000 over the next ten years. By the time they reach retirement, assuming they continue to earn salary increases, their total lifetime earnings by age 64 should be over $3,000,000.
Knowing that you’re likely to reach at least $3 million in total earnings over the course of your life may seem surprising. Perhaps you haven’t focused on saving earlier in your career and now wonder or lament where the money you earned has gone. Creating a system to save and manage your wealth will help you keep more of your hard-earned income. Make sure to account for rising average life expectancy ages when calculating what each earner in your household should save.
Here are a few tools to help you save enough to last a lifetime. While the average life expectancy in America is age 75, we always recommend accounting for increasingly longer lifespans as the figure continues to rise with improvements in medical technology.
The envelope method is simple. By separating your spending into categories, you can create a real-life or virtual envelopes for each category. For example, if you spend $100 weekly on dining out, for the month you should set aside $400 for dining out.
If you run out of the budgeted amount of money in your envelope, your spending on that category should cease for the month. This method of money tracking makes you more aware of your spending. Hopefully, it will help you curb impulse buying and allow you to more into savings.
This one seems self-explanatory, but it requires a bit of work. Leave your credit cards at home when you go shopping and pay in cash instead. If you’re using the envelope system, put no more than your maximum budgeted amount in the envelope, and don’t go over your limit. If that’s too inconvenient, create a savings account for discretionary spending and link a debit card to that account so you aren’t able to overspend.
You can also seek advice from financial coaches who can help you solidify your budget and track your progress. It’s important to budget for entertainment, vacations, and other things that make life more meaningful. However, you’ll also need a plan to stay on track with your retirement savings goals.
Retirement planning encompasses everything needed to save and invest money to support yourself once you stop working. Saving builds wealth, and investing compounds it so that you will have more money available for your bank account in retirement. There are two things that you can do immediately to expedite the process.
If your employer sponsors a 401(k) plan, contribute the maximum amount that you can afford until you hit the maximum amount allowed by the plan. Some employers match employee contributions up to a certain percentage of your income. So, if your employer matches 50% up to a 6% max, make sure you allocate at least 6% of your income to your retirement plan. Your employer will match 3% of that, which is basically free pre-tax income and will grow tax-deferred into retirement. (You don’t pay income taxes on this money until you take it out to spend in retirement!)
In 2022, you can save a maximum of $20,500 in a 401(k) plan. Those age 50 or older can put away up to $27,000. The less you spend, the more you can put into retirement accounts and, if you put more into pre-tax retirement accounts, the less you’ll pay in income taxes.
If your company doesn’t offer a 401(k) plan you can still save for retirement by opening an individual retirement account (IRA). Your financial advisor can explain how these plans work in detail and help you choose the right kind of IRA that matches your goals. Some IRAs come with tax-deductible contributions, and in all of them, your money grows tax-free until you distribute it. If you are self-employed, you may have the option to open and fund an individual solo 401(k) or what’s known as a SEP IRA. Your financial advisor will be able to explain these accounts as well, and help you determine which account type matches best with your goals.
Does your job come with a pension plan? If so, take full advantage of it to help increase your income in retirement.
There are many investment options available in retirement accounts, including stocks, bonds, and mutual funds that should increase in value over time to increase your net worth for your retirement years later in life.
The 50/30/20 rule of thumb acts as a guide to help you avoid overspending. Under this plan, you spend 50% of your income on needs, 30% on wants, and 20% on savings and other financial goals.
Needs include things you can’t live without, such as:
Wants are things you love or want but don’t need to survive, including:
Savings and financial goals help you save to prepare for your future, and may include:
This 50/30/20 is just a rule of thumb, but it is a convenient start to a budget. It is important to remember that budgets are meant to bend, so if you live in an area where the cost of living is higher, your “needs” bucket may be slightly higher. If you need to increase that to accommodate, it’s okay to shrink your “wants” bucket; the goal is to try to always keep your “savings” bucket to at least 20%.
Purchasing life insurance can provide for your family should something happen to you. Although you’ll never see the ultimate benefit of having a policy, it can give you peace of mind and help you leave something behind for your children and spouse. You should talk with a fiduciary financial advisor to make sure that you are properly insured but not unnecessarily over-insured. Insurance is an expense that should be smartly monitored.
Homeowners insurance can protect you from catastrophic loss. If your house burns down or vandals cause thousands of dollars in damages, homeowners insurance protects you from devastating financial loss.
You may wonder what your healthcare plan has to do with financial planning. You’ll no longer wonder if you have a hospital stay and receive the bill at the end. If you don’t have coverage, or you don’t understand the coverage that you do have, you’ll quickly find that medical care can be ridiculously expensive. You can usually get insurance through your employer, but your financial advisor can make suggestions or even provide feedback on the options available to you.
Although Social Security supports millions of older Americans, there is no guarantee about the program’s future. It’s better to have saved enough on your own to be able to support yourself in retirement. Even if you do receive it, the actual cost of living is rising much faster than the Social Security adjustments are.
Yes, you should avoid debt if at all possible. However, there’s a difference between necessary and unnecessary debt. For example, few people have the ability to pay cash for a home. What is unnecessary debt? Credit card debt from dining at expensive restaurants or taking vacations every six months falls in this category. Getting a car loan on a new car with monthly payments that take up more than 20% of your “needs” bucket falls into this category. Buy used instead or something that is within your budget. We’d argue that taking on excessive student loan debt to stay in school longer or get a hard-to-get or low-paying job falls into this category.
Keep in mind that both necessary and unnecessary debt can negatively impact your credit score and jeopardize your financial goals. For example, not paying off your credit card bill in full every month can become a dirty and vicious cycle. If you don’t pay off your credit card bill in full, the next month part of your payment will go toward interest, and part of it will go toward the principal. The longer you carry the debt without paying it off in full, the more you’ll wind up paying in interest. And the interest rates on credit card debt are usually very high. This can become a vicious cycle if you continuously live beyond your means and keeps many people from becoming financially successful.
Your debt level accounts for 30% of your credit score. You could pay every bill on time for the rest of your life, but if you never pay the full balance, your credit score could still remain low. If you are stuck in this cycle, don’t have enough to cover the full balance, and don’t know where to start, you can begin by making additional payments on loan balances or pay twice a month (once a paycheck) to decrease the total balance.
Unnecessary debt could prevent you from properly saving for your retirement and other savings goals, owning property, and accessing low-interest credit.
If you are saving regularly but don’t know if you’re using the best accounts, don’t know a stock from a mutual fund (much less how to choose which one may make the most sense for you), and want to make sure that you’re making prudent, informed and tax-aware decisions regarding your financial future, including your retirement and estate, you might need a financial advisor.
Korving & Company offers financial planning services and can help advise you on the best ways to put aside money today to reach your goals for tomorrow. Whatever priorities and goals you have for your financial future, our experts can help you make them happen.
Working with Korving & Co., you gain access to a personal financial advisor. Our financial services and financial planning experts help you build solid portfolios for retirement and your other important priorities.
Contact us today to start your personalized investment plan.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.