Saving by Spending Money
Posted on | August 1, 2009 | No Comments
I once had a science teacher who told me that if you save 10% of everything you earn over a lifetime, you will be a millionaire. The thought used to boggle my mind. Ten percent of income seemed like such a small amount compared to the seemingly unattainable $1,000,000 mark, especially back in high school when I was only making $98 per week. I’ve thought about this statement every so often over the last decade, and have come up with an idea on my own. What happens if you save 10% on everything you spend over a lifetime? Some people are natural savers, so saving 10% out of their paychecks is not a problem. But many people are not natural savers, or find themselves in a situation where they are living paycheck-to-paycheck. Simply by changing their perspective and getting a 10% discount off of everything they spend, natural-born spenders can amass a savings as well.
Saving 10% here and there on everyday purchases may not seem to add up to much: 10% off of a candy bar is $0.10, 10% off of a new outfit is $6.00, 10% off of an airplane ticket is $30. But if you make an effort to receive a 10% discount off of everything that you buy over the course of a lifetime, suddenly the numbers are quite impressive. In order to show you what this could amount to, I looked at a number of statistics to calculate total earnings in a lifetime, minus total assets/savings left at the end of that lifetime (i.e. inheritance left for the next generation). When you subtract the two, you get an approximation of the amount of money spent in one’s lifetime.
According to a 2006 study by AARP entitled In Their Dreams: What Will Boomers Inherit?, AARP found that the median inheritance is $64,000. Let’s assume, for the sake of this article, that there are 2 children per family, each receiving this $64,000, making it a total net inheritance from one generation to the next of $128,000. If we look at lifetime earning statistics, we see that a household with one income earner with a bachelor’s degree (scroll to Page 2) will net, on average, $2.1 million of earned income in their lifetime. That means that for the example above, this household will have spent a total of approximately $1,972,000 in their lifetime (total income earned over a lifetime minus inheritance left for the next generation). That’s quite a chunk of change passing through a household’s hands.
If this household made an effort to get a 10% discount on everything they purchase, they are looking at amassing $197,200. Granted, they need to actually put this 10% savings into a savings account to see this accumulation (discussed in series: Bank It!), but what a difference discounts and coupons can make over a long period of time!
Another way to get an average is to take the US Consumer Unit Expenditures provided by the Department of Labor—for 2008 it is $49,638 minus the categories of insurance, pension and cash contributions, which makes it $42,481—and divide that by 10% to get $4,248 as the annual amount of money a person could put into savings, even if they spent every dime of their paycheck. Over a lifetime of 45 working years without assuming any sort of interest or dividends earned, that amount would add up to $192,645.
Some assumptions are used, and because these statistics are averages, it may not apply to your own situation. You can go here to calculate your own approximate lifetime earnings (please note, example figures are already inserted into the input fields—these do not reflect my own earnings!). You might be surprised at how much money you will bring home in a paycheck over a lifetime. Are you a saver, or a spender? Perhaps both? If you are a spender, and probably will never amass much of a savings account or retirement (no criticism here) figure out what 10% of your lifetime earnings/spending is, and see what you could amass by simply asking for a 10% discount on everything you purchase.
By keeping your same spending habits and just adding in a coupon, deal, or haggling a little at the cash register, you will be able to stock up quite a bit of savings over a lifetime. Perhaps that is what they mean by purchasing power.
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Tags: Saving Money > spending money
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