How Budgeting in Your Early Years Can Affect your Retirement Savings


Habits are a powerful thing. So powerful, in fact, that you often forget why you began doing things that way to begin with. This can be the case for those who have reached the age of 50 with no retirement savings when that time is twenty (or less) years away.

The budget you set up in your early twenties or thirties may still be the one you use today. An example might look like this:

  • 40% housing (mortgage or rent)
  • 20% utilities
  • 15% transportation
  • 15% groceries
  • 10% other (outings, projects, etc.)

But that doesn’t make sense anymore because that budget only allows you to live week to week. There isn’t any shame in having done this, of course. Many families with children live week by week, or paycheck to paycheck. Now, however, you need to adjust things to compensate for a looming retirement date.


A New Budget When Starting at 50

The very first thing you need to do when creating a new budget for saving is to decrease other spending areas. If possible, start by downsizing your home by 5-10% of your budget. Either move into a smaller residence or rent out your spare bedrooms to increase your income. This should naturally decrease your utilities by about 5% also.

Now you’ve created (at the high end) 15% of your income that can be saved. What’s next? Try reducing grocery costs to 10% by using coupons, purchasing cheaper brands, or cutting unnecessary items from your budget. Finally, learn to do without. Cut “other” spending to 5% and go out less often.

You now have 25% of your budget free to save towards retirement over the next 15 to 20 years. If your monthly income is, say, $2K, that is $500 a month you can now save. By retirement you’ll have (before interest) $90K to $120K.

But that isn’t enough. Consider other ways to increase your savings. Two prime examples include placing all of your overtime earnings into savings and any income tax refunds you receive. Even 75% of the later could prove significant.

The following numbers are just ballparks, of course, and might not reflect your situation. But let’s say you earned about $500 in overtime earnings over those 15 to 20 years and received $1,000 back on  your income tax refund each year, of which you saved 75% ($750). Those two things, over time, equal an additional $18,750 to $25,000 for retirement.

A Better Budget For Your Early Years

If you’re lucky enough to be reading this pre-50, then the best thing you can do is begin saving for retirement NOW. Don’t get wrapped up in how much. Even those young families who are living paycheck to paycheck can squeeze a small something out.

Let’s say you only manage $5 a week between the ages of 20 and 50. That ends up being $7,800 before interest. If dual-income couples each save $5? That’s $15,600. It may not seem significant, but when you reach 50 it is better to have something saved versus starting entirely from scratch.