How to be frugal and invest the difference

It can be disappointing to hear that the secret to building the finances necessary to fund a comfortable retirement is that there are no secrets. All you have to do is live below your means, invest the surplus and stay the course. This simple strategy gives almost everybody a chance to accumulate wealth. And if you are willing to reduce your expenses and use the money to buy an index fund, your investments may eventually churn out enough income to allow you to pay your bills without working for the rest of your life.

Don’t believe me? Here’s an example to illustrate the point. Let’s say you found a way to cut out an expense that costs $50 a month and instead saved that amount every month. After 15 years that $50 a month contribution will grow to $15,848, assuming 7 percent annual returns. And 30 years of saving $50 a month will lead to about $61,000. If you then use the 4 percent safe withdrawal rule, this amount of savings will allow you to withdraw $203 per month throughout retirement adjusted for inflation. That’s a lot more purchasing power than the $50 per month you gave up to save for retirement.

Of course, first you have to find $50 a month in savings. Here are three easy ways to cut spending so that you can begin to grow wealth:

Reduce your phone bill. There was a time not long ago when cellphones and especially smartphones were considered luxuries. But if your smartphone is a necessity for you now, there’s no reason you also need a traditional phone line. Paying for both a cell phone and land line is duplicating the same service. Pick one, and reduce your monthly cost. Carefully weighing the benefits of family plans and various data packages can also save you a significant amount of money.

Cut out cable. Many families pay $100 a month or more just to watch TV. But there are lots of ways to watch the shows you love at a lower cost. Some networks put many of their shows online for free, and a Netflix or Hulu subscription gives you lots of TV options at a fraction of the cost of cable. We don’t have a cable subscription and don’t miss it. If you can’t possibly part with your cable TV subscription, consider negotiating your rate or switching providers to lower your monthly payments.

Save while eating out. You don’t have to stop going out to eat all together. Just stop ordering $5 drinks for every member of your family when you do go out and you’ll easily save $50 a month without reducing the frequency. And many places have main courses that are plenty big without tacking on appetizers and dessert. A few minor adjustments to your dining habits could easily result in $50 in savings.

Once you find your $50 per month in savings, the key is to invest the money, preferably in a tax-preferred account. Putting the savings in a traditional 401(k) or IRA will allow you to get a tax break and your savings will grow unhindered by taxes until you withdraw the money. However, after-tax Roth IRAs and Roth 401(k)s can also be a good choice, especially if you are currently in a low tax bracket. Then you can pay tax on the money now at your low rate and withdrawals from the account in retirement will be tax free. If your employer will match your retirement account contributions your money will grow even faster.

Building wealth is easy enough, but most people can’t seem to do it. It’s important to make sure you invest the $50 per month you cut out of your budget and don’t just shift your spending to something else.

David Ning is the founder of MoneyNing.com .

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How to Be Frugal and Invest the Difference originally appeared on usnews.com

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