5 Spending Habits Potentially Keeping You from Bolstering Your 401K Funding

Routinely eating out, keeping up with the latest technology trends and buying new cars are seemingly harmless practices that could be affecting your 401k balance.

house_and_calculator.jpgAccording to research released from the Vanguard Group and Fidelity Investments, as of 2018, the median 401K balance is $24,8001—a relatively concerning figure in the financial services field. One of the reasons behind this are the rates Americans are adding to their 401Ks. While most advisors recommend you contribute about 15 percent of your paycheck to your 401K, the average (unmatched) rate among participants of the Vanguard and Fidelity research is a little less than half that—6.8 percent.2

Many of us have enough trouble managing monthly expenses like food, utilities, rent and mortgage payments (just to mention a few). Having said that, it’s not as inconceivable to bolster your 401K contributions. A 2017 Pew study found 46 percent of Americans spend more money than they make every month,3 which correlates with the findings from a 2018 Charles Schwab survey, where two-thirds of participants said they would sacrifice past spending to save more for retirement.4 Take the time to evaluate your spending patterns, and you can find subtle changes to help free additional money you can use to increase your 401K contributions. Below are five major spending habits that could be keeping you from boosting your 401K funding.

1. Dining Out

How it’s costing you: According to the 2018 Charles Schwab study, 55 percent of participants would sacrifice how often they dined out to save more for retirement.4 Research indicates 50 percent of Americans don’t like to cook anymore,5 while the average household spent an average of $3,008 per year dining out last year.6 2015-2016 was the first instance where Americans spent more money at bars and restaurants ($54.857 billion) than groceries ($52.503 billion6).

Ways you can save: Research has revealed it’s almost five times more expensive to dine out or order food than cooking your own meals.7 According to a study conducted by Wellio,7 the average meal price at a restaurant is about $20, whereas one serving from a homecooked meal cost roughly $4.31. If someone who orders out four times a week ($80 a week, $4,160 a year) reduces their frequency to just once a week ($20 a week, $1040 a year), they can save themselves over $3,000 annually.

2. Expensive Clothing

How it’s costing you: Since 2015, the U.S. Bureau of Labor Statistics reports the average household spent between $1,803-$1,846 a year on apparel. 31 percent of the Charles Schwab study participants4 would sacrifice expensive clothing purchases to save more for retirement. Social incentives like status and trendiness are primarily behind many costly apparel purchases, making it something most people “want” rather than need. While clothing hasn’t seen a dramatic spike or drop in prices over the years,8 average purchases have remained well above $110.

Ways you can save: When it comes to incorporating material purchases like clothing in your budget, many financial advisors recommend the five percent rule, where you multiply your monthly income by .05. So, if you make $2,800 a month after taxes, financial advisors would recommend you maintain a monthly apparel budget of $140 ($1,680 per year).

3. New Cars

How it’s costing you: The next notable spending habit on the Charles Schwab survey that participants would have sacrificed were new cars at 28 percent. In 2017, the average household spent $4,054 on vehicle purchases. This isn’t surprising, considering how Americans are spending record amounts on new vehicles, while the average price of a new car is around $36,5009—a 13 percent increase from December 2012. Let’s also consider the costs of insurance and maintenance, which are typically more expensive for newer vehicles than older models.

Ways you can save: The costs of buying a new car go well beyond the advertised price. Financing, leasing, and state licensing fees; state and local taxes; and fuel economy estimates are just some of the up-front payments you make. Cars also depreciate over time, meaning they lose 10-20 percent of their value within one year and up to 50 percent after three.10 While the fees and taxes may persist, buying used cars is a viable option. The average person owns 13 cars in their lifetime, individually costing an average of $30,000.10 If each of those vehicles was a three-year-old used car instead, it could result in lifetime savings of thousands of dollars, when taking car depreciation into account.

4. Vacations

How it’s costing you: Another 28 percent of participants in the Charles Schwab survey cited vacations as a top spending habit they would have sacrificed to save more for retirement.4 A 2017 LearnVest Money Habits and Confessions survey found 74 percent of respondents have gone into some degree of debt to pay for a vacation.11 In addition, the average American spends 10 percent of their annual income on vacations,11 while a quarter of respondents reported spending 15 percent or more. 55 percent of Americans even admitted to forgetting or failing to incorporate vacations in their annual budget,11 while two-thirds of respondents reported a week-long vacation costs them more than a one-month mortgage or rent payment.11

Ways you can save: Timeliness and organization can prevent a vacation from becoming a financial burden. Taking simple steps like researching flight, hotel, food, and entertainment prices can give you an idea on your trip’s total costs. Starting a vacation fund while calculating how much to set aside each week can keep you disciplined enough to put the necessary funds towards your getaway, without making subsequent financial setbacks an inevitability.

5. Buying the Latest Tech Gadgets

How it’s costing you: Technology has become a trend that an increasing number of people want to keep up with, which makes it understandable why 26 percent of participants in the Charles Schwab study cited buying the newest tech gadgets as a spending habit they would sacrifice to bolster their retirement savings.4 The average household spent $7,900 on tech gadgets in 2015 alone, most of which went toward services than the device itself. What’s especially notable are the collective spending averages among individuals over 40 that were employed with and without kids, which totaled to $16,400.12

Ways you can save: Like clothing, overspending on gadgets and devices is ultimately more of a “want” than a need, in addition to being prompted by factors like status and keeping trendy. While the five percent rule can technically apply to this situation, individuals and households can prioritize on consolidating when purchasing technological gadgets and devices. Why buy three separate gadgets performing three different tasks that cost around $80 each if you can buy one device that does all three, for around $150-180? It also doesn’t hurt to research different brands instead of simply purchasing what’s popular.

Taking the above tips into consideration can help save money for the future of yourself and your loved ones. While the amount of money you free up may differ compared to other people, how those extra funds are utilized is what makes the difference. To figure out ways you can cut back on your spending habits and how to apply that money toward your retirement, reach out to one of our financial advisors.

Interested in discussing this topic further with a financial advisor? With offices in 23 states, there is likely a North Star financial advisor near you. Contact an advisor here.

1O'Shea, A. (2019, May 31). The Average 401(k) Balance by Age. Retrieved June 26, 2019, from https://www.nerdwallet.com/article/investing/the-average-401k-balance-by-age  

2Brandon, E. (2018, July 23). Are Your Retirement Savings Ahead of the Curve? Retrieved June 26, 2019, from https://money.usnews.com/money/retirement/401ks/articles/2018-07-23/are-your-retirement-savings-ahead-of-the-curve

3How Income Volatility Interacts with American Families' Financial Security. (2017, March 9). Retrieved June 26, 2019, from https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/03/how-income-volatility-interacts-with-american-families-financial-security

4Meals Out, Pricey Clothes & New Cars Top Spending Regrets for Americans Trying to Save for Retirement, Schwab 401(k) Survey Finds. (2017, August 27). Retrieved June 26, 2019, from https://pressroom.aboutschwab.com/press-release/schwab-corporate-retirement-services-news/meals-out-pricey-clothes-new-cars-top-spendi

5Yoon, E. (2017, September 25). The Grocery Industry Confronts a New Problem: Only 10% of Americans Love Cooking. Retrieved June 26, 2019, from https://hbr.org/2017/09/the-grocery-industry-confronts-a-new-problem-only-10-of-americans-love-cooking

6Consumer Expenditures in 2017: BLS Reports. (2019, April 01). Retrieved June 26, 2019, from https://www.bls.gov/opub/reports/consumer-expenditures/2017/home.htm

7Priceonomics. (2018, July 10). Here's How Much Money You Save By Cooking At Home. Retrieved June 26, 2019, from https://www.forbes.com/sites/priceonomics/2018/07/10/heres-how-much-money-do-you-save-by-cooking-at-home/#708c9c2e35e5

8US clothing prices aren't rising with the overall consumer price index. (2018, February 22). Retrieved June 26, 2019, from https://www.theatlas.com/charts/HkvTYIhwz

9DeBord, M. (2018, January 04). Americans are spending a record amount of money on new cars and trucks. Retrieved June 26, 2019, from https://www.businessinsider.com/americans-spending-big-money-for-new-cars-2018-1

10Reed, P. (2017, June 27). Compare the Costs: Buying a New Car vs. Used. Retrieved June 26, 2019, from https://www.nerdwallet.com/blog/loans/compare-costs-buying-new-car-vs-used/

11Liu, J. (2017, June 30). Most Americans Are Taking Vacations They Can't Afford. Retrieved June 26, 2019, from https://www.forbes.com/sites/learnvest/2017/06/30/most-americans-are-taking-vacations-they-cant-afford/#79be2334577a

12MetaFacts. (2017, June 16). Technology Spending – Beyond Owned Gadgets. Retrieved June 26, 2019, from https://technologyuser.com/2017/03/30/technology-spending-beyond-owned-gadgets/

2256875 / DOFU 10-2018

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