According to the U.S. Bureau of Economic Analysis, the rate at which Americans save has ranged between -1% and approximately 4% between 2005 and 2009. The fiscal year 2005 displayed the dismal nonchalance of many, as Americans flaunted a negative savings rate. Rather than save, most people reduced their savings and delved further into debt in order to purchase goods and services.

Many consumers are also saddled with high interest debt such as credit cards. If that isn't enough to show the need for greater spending restraint, consider that there were over 1 million personal bankruptcy filings in 2008.

Not only do individuals need to avoid excess (and high interest) leverage as well as prudently manage cash flow, they should also be managing a longer-term need: setting aside for a comfortable retirement. People can be lulled into becoming overly optimistic when looking at their savings requirements for retirement given historical trends in U.S. market performance as well as life expectancy.

The only trends that are relevant for the individual, however, are those that occur over the course of one's lifetime. Many companies are transitioning jobs (such as back-office functions, IT, research, and even higher margin services such as consulting and financial services) to other regions of the world, including Eastern Europe, India and China.

The economic dynamics – and implications – of such movement mean today's business settings are not comparable to those of the past 50 years. At the same time, medical breakthroughs and other health-related variables have increased people's life expectancy. It is better to have a conservative outlook in order to help ensure one has adequate retirement funds.

Financial Scenarios
Saving money and diverting cash away from unnecessary frills and wasteful spending into investment payments – say in the stock market – can translate to huge differences in the size of one's retirement savings. When you purchase a bicycle or go on a lavish dinner, you are not simply incurring a cost of that bike or dinner (say $100). The amount of the receipt is actually misleading. When you incorporate the basic laws of finance, the opportunity cost of that $100 is much more.

If you eliminate $100 of wasteful spending per month and instead channel that cash to an investment vehicle that yields an annual interest rate of 10%, that translates to over $75,000 added to your nest egg by year 20. That amounts to over half a million dollars over the course of 40 years. Granted, this figure is affected by inflation; however, the prudent person still reaps the benefits of not wasting cash on unnecessary things. Here's how this strategy plays out:

Starting principal balance: $0
Monthly investment payments: $100
Interest rate: 10%
Future value: 20 years = $75,603.00
Future value: 40 years = $584,222.17

Starting principal balance: $0
Monthly investment payments: $250
Interest rate: 10%
Future value: 20 years = $189,007.50
Future value: 40 years = $1,460,555.43

If someone were motivated enough to find $500 a month and store it away in the form of investment payments, the results lead to an exponential increase in comfort during one's retirement. With an annual rate of return of 10% over 40 years, the figure approaches $3 million for your nest egg.

How much more sizable would your nest egg be if you work for a company that matches your 401(k) dollar for dollar up to a certain amount? Given that the federal government's social safety net programs such as Social Security and Medicare are expected to hit fiscal challenges as the baby boomers retire, taking your retirement circumstances into your own hands is a good defensive move.

Also, the high cost of healthcare in the United States is a primary reason that individuals and couples are filing for personal bankruptcy. Compound interest can help you to avoid financial straits in the future. Here's how it looks.

Starting principal balance: $0
Monthly investment payments: $500
Interest rate: 10%
Future value: 20 years = $378,015.00
Future value: 40 years = $2,921,110.87

Something as simple as less restaurant meals can easily save the typical professional between $100 and $200. Besides, eating out makes you fat. Why pay someone to lessen your state of health?

Purchase discipline at groceries and malls. At the end of your life, a lifetime's habit of impulse buying will leave you with nothing but a garage full of junk. Instead, realize the tremendous opportunity cost that comes from saving and the power of compound interest. Most people can save between a hundred dollars to several hundred dollars a month with just a little spending discipline.

If you work for a company that matches your retirement savings contributions, absolutely take advantage of it. It is basically free money. And the increase in monthly contributions translates into an exponentially larger nest egg over the course of a lifetime.

Want to know more? Take a look at these related articles: Can You Retire In Five Years? and Weave Your Own Retirement Safety Net.

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