Shabbir's Diary

How to save more money for retirement, without actually putting one more dime into your IRA

Since we moved to California I've pitched in to take my turn at steering the family finances.  I've setup Quicken, combined our money, put us on a strict budget and examined all our retirement finances.  One of the things I became obsessed with is our retirement funds.  One thing I focused on was a Simple IRA at Fidelity that I can't move to be managed by Sarah's broker who has most of our nest egg.  Since I still work at the company where I started the Simple IRA, I have to leave it there and manage it myself. 

I had just blindly been putting it into a lifecycle fund with basically tracked the performance of the markets and had a 0.82% annual expense rate.  That means that no matter what the market did I was paying 0.82% in expenses.  I thought this was good when I started the plan until I checked out some other ETFs (Exchange Traded Funds) that can have expenses as low as 0.07% and also perform as well (or as bad as) the overall market.

Then this article appeared in the Wall Street Journal about how you can construct a pretty impressive portfolio based around ETFs for just 0.15%.  Why bother?  What's the difference?  Well the difference of 0.67% is real money.  Annually you can shove in around $10,000 tax free to most retirement vehicles like IRAs and 401ks.  That 0.67% is $67 extra you can put in.  If you're not at your first job and you've been saving like this for five years, then you've got at least $50,000 in your retirement account.  Every year you save 0.067% you have an additional $335.  Over time that starts to add up.  After 10 years you probably have at least $100,000, and that's $670 extra you've saved for yourself, without actually putting any more money into the account.

Tip: Use free Starbucks cards to self-budget your coffee habit.

Sarah and I use Quicken to manage an annual household budget.  Everything goes in there.  Monthly set-asides for the property tax bills, the home insurance, we've got it all covered.  It should come as no surprise when we began this process that we were living beyond our means.

As we began to lockdown our personal finances and set up our savings set asides we had to stop spending money without thought for it's impact on the rest of the budget.  One of the small (by percentage) but pernicious expenses was Starbucks.  Neither of us wanted to give up Starbucks, but we had to get it under control.  However we didn't want to carry around receipts all month to see how close we were to our limit.

The solution was easy.  I set each of us up with free, Starbucks debit cards and loaded them with $50 each.  Whenever we go to get coffee from there (and they are everywhere) we use the debit card.  The Starbucks receipt always show you how much you have left on the card and at the end of the month I can refill the cards through the Starbucks website.  (You can also have it done automatically on a schedule if you know you're going to use it all each month)

As the month goes by, I can see if I'm ahead or behind in my Starbucks budget simply by looking at my receipts.  Is the month half over?  If so, and I have more than $25 left on my card, I'm doing great.  If not I need to slow down.  When I run out, it's time to stop drinking coffee until the end of the month.  It's a simple but effective personal budgeting tool.