The Story of Goldilocks and the Three Retirement Contributions

Goldilocks and the Three Bears

By Jen Smith, The Millionaire Mommy Next Door

Once upon a time, Goldilocks went for a walk.  Pretty soon, she came upon her bank.  She asked the bank teller for her retirement account balance and when she was shown the number, she wept.

Goldilocks returned home to assess her budget and see where she could come up with some extra money to make regular IRA contributions. She thought about quitting her latte habit. $3 saved per day could grow to $177,706 in thirty years.

“This idea is too soft!” she exclaimed.

So she returned to her budget and considered cutting her housing and utility expenses in half by downsizing to a much smaller home. $1200 saved per month could compound into $2,389,653 in thirty years.

“This idea is too hard,” she said.

So she returned to her budget and took aim on her transportation costs. If she sold her car and used her city’s excellent public transportation system instead, she could save $780 per month. In thirty years, her retirement fund could blossom into $1,553,275.

“Ahhh, this idea is just right,” she said happily. Goldilocks sold her car, walked back to her bank, and made a contribution to her retirement account.

Thirty years later, Goldilocks retired, and lived happily ever after.

THE END

For illustration purposes, results were calculated at 10.00% ROI compounded annually. The actual rate of return is largely dependent on the type of investments you choose. Over the most recent 30 year span, from January 1, 1980 to December 31, 2009, the compound annual growth rate (annualized return) for the S&P 500, including reinvestment of dividends, was 11.29% (source). Total savings are calculated in actual dollars (not inflation-adjusted). A common measure of inflation in the U.S. is the Consumer Price Index (CPI), which has a long-term average of 3.1% annually (from 1925 through 2008).

Do you know how many dollars your spare room is costing you?

Do you have a guest room but few friends? (sorry.) A formal dining room that looks pretty because it rarely sees a crumb? A formal living room that only gets walked through on the way to your home’s hub: the kitchen and family room? Spare rooms… you dust them, vacuum them, furnish them, paint them, fuss over them… but rarely do you LIVE in them.

How many dollars does a spare room cost?

I pondered this question during our walk to our neighborhood park today. Our condo is surrounded by large suburban homes. Each home statistically has an average of 2.5 people living in it. I suppose the poor little 0.5 member is missing a few body parts. Probably from all that excess dusting. I digress. I look at these gigantic homes and wonder how many of their rooms get LIVED in on a daily basis versus how many sit pretty all day long but never see any true love.

So being the environmentally sensitive money gal that I am, I crunched some numbers today to see if I might encourage a few folks to join me in downsizing to a just-the-right-size home.

For those of you that don’t enjoy numbers as much as I do, I’ll get to the punchline pronto:

In my neighborhood, a typical 12′ x 12′ spare room (guest room, formal dining room, whatever) could cost about $350,000 EACH over the course of a 30 year mortgage!

Mommy’s Million Dollar Recipe: Dusty Room Dump-lings

Downsize your home by 432 square feet (three 12’x12′ rooms)
Which will reduce your monthly housing expenses by $530 a month
And invest your monthly savings into a diversified investment portfolio
Yield: Over one million dollars ($1,000,000) in 30 years!

For my fellow number nerds, here’s the assumptions I used for my calculations:

12′ x 12′ = 144 square foot spare room
Typical cost of housing per square foot (in my location) = $150
= $21,600 cost per spare room
@ 5.5% mortgage interest rate for 30 year fixed
= $122.64 month / room in principal and interest cost
+ $18 / month / room in property taxes (1% of value annually)
+ $9 / month / room in homeowner’s insurance (0.5% of value annually)
+ $27 / month / room in allowance for periodic maintenance, repairs, remodeling (1.5% of value annually)
= $176.64 / month / room…
…NOT including extra utility expense or furnishings
+ lost opportunity cost of $176.64 savings invested at 10% long-term compounding average annual return for 30 years (mortgage term)
= $348,692 TOTAL PER SPARE ROOM (x 3 rooms = $1,046,076)

So what do you think? Is this million dollar recipe worth dumping a spare room or three?

How to Make a Million Dollars While Eating Lunch

In response to my last post, Would You Ditch A Car For $1,000,000?, a reader made the comment: “As a grad student in an urban area, I don’t have a car (nor could I afford one) and I use public transit. … I wish there was a “big ticket” item like that that I could easily cut out of my life, but there just isn’t. Instead I try to cut back on small things and aggressively invest for cashflow.”

While savings do accumulate faster when you cut back on the biggest budget-buster categories (housing, transportation, insurance and taxes), the little things do add up. Take for instance:

My Million Dollar Lunch Recipe

  1. Replace your $9.50 restaurant lunches (sandwich, fries, soft drink, sales tax, tip and mileage) with a nutritious $3.00 lunch brought from home.
  2. Deposit your $143 monthly savings ($6.50 daily, 22 working days a month) into a Roth IRA retirement account.
  3. Invest in equities (stocks, mutual funds) at a 10%* annual long-term average rate of return.
  4. Let your account simmer for 41 years.

Recipe Yield = $1,000,837

Serve: During retirement with whipped cream and a cherry on top.

Ingredients:
Total deposits = $70,356
Total interest earned = $930,481
Total taxes paid = $0
Total Saved= $1,000,837

Optional Garnishes:

  • Combine with a 20 minute walk to the park for lunch.

    Yield: 1,277,232 calories— enough to keep off (or lose) 365 pounds! (Calculated for a person weighing 140 pounds walking 4mph for 20 minutes (1.33 miles) 5 days a week for 41 years.)

  • Pack a lunch for your spouse.

    Yield: An additional $1,000,837

  • Add a group of supportive friends for lunch to work on the Baby Steps to Financial Freedom together. Yield: Financial freedom – with friends who will have the resources to enjoy it with you!

Isn’t it amazing how much money you can amass by investing small amounts over long periods of time?

Once you think in terms of investing instead of spending, look for ways to duplicate this process in other ways. Consider the following actions:

  • buy staples in bulk and invest your savings

  • invest your employee bonuses

  • invest unexpected financial gifts and inheritances

  • invest your tax refunds

  • buy a term life insurance policy instead of a whole life one and invest your monthly premium savings

  • buy a used car instead of new and invest the difference in price

  • borrow books, movies and music from your local public library and invest your savings

  • save and invest your pocket change

Imagine this: Starting with $0 and depositing $5,000 annually in a Roth IRA account over 41 years (at a 10%* annual rate of return compounded monthly), you will have $3,081,554.

Ingredients:
Total deposits = $210,000
Total interest earned = $2,871,554
Total taxes paid = $0
Total Saved= $3,081,554

Choose affordable and cost-effective options and rather than feel deprived, feel excited that you get to invest the difference in yourself and your future.

~ Bon Appetit!

ooOOOoo

*The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com).

Total savings are calculated in actual dollars (not inflation-adjusted). A common measure of inflation in the U.S. is the Consumer Price Index (CPI), which has a long-term average of 3.1% annually, from 1925 through 2008.

Would You Ditch A Car For $1,000,000 (One Million Dollars)?

A study found that households with 3 or more cars are the single largest group among American car owners. The national average is 2.28 vehicles per household. Obviously, Americans are very much in love with the automobile.

According to the AAA, the average American spends $9,369, excluding loan payments, to drive ONE medium sedan 15,000 a year. In arriving at this estimate, AAA figures in fuel, routine maintenance, tires, insurance, license and registration, loan finance charges and depreciation costs.

22 years ago, my husband and I sold one of our cars to pay for our wedding and honeymoon. We intended to replace the sold vehicle eventually — after we built up our credit score so we could get a car loan — but as time went by, we discovered that sharing one car between the two of us was no big deal. We learned to carpool, drop one another off, take turns, group errands, walk, bike, take the bus, work from an in-home office, go places together. Surprisingly, 22 years later, we still share just one car.

It would be difficult to figure out exactly how much my husband and I have saved over the past 22 years (with the effects of inflation), but it is easy to calculate how much more we can save if we continue to share one vehicle:

If we continue to share one car instead of owning two for the the next 29 years, invest our compounded annual savings and earn an 8%* annual rate of return, we could save an additional one million dollars**.

Would you be willing to ditch a car for a cool million? Let us know in the comments.

*The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com).

**actual value with annual investments adjusted for inflation @ 3.1%*** annually.

***A common measure of inflation in the U.S. is the Consumer Price Index (CPI), which has a long-term average of 3.1% annually, from 1925 through 2008.