How to Keep Revenge Spending From Ruining Your Retirement

“In less than a year, I maxed out my credit cards,” she said. Because she didn’t have any savings, Ms. Colon took a $20,000 loan from her 401(k) account to pay off the debt, which then hindered her retirement savings for years.

It’s tougher to fritter away funds, however, when you have financial guardrails in place.

To establish boundaries, Pauline Roteta, a certified financial planner and the chief executive of Pasito, a financial software company, recommends following the “50-30-20 rule.” That means putting 50 percent of your paycheck toward needs, like housing costs and other major bills; 30 percent toward wants, like entertainment and eating out; and 20 percent toward savings goals, like retirement.

Taking this approach finally helped Ms. Colon get her finances in order. This year, she and her husband are contributing the maximum amount to their 401(k) plan and investing $7,300, the annual maximum, of pretax dollars in their Health Savings Account.

When it comes to retirement savings, Ms. Roteta suggests educating yourself about investment vehicles like an individual retirement account and a 401(k) plan. Pay attention to yearly contribution limits and income thresholds across accounts, she said. If you’re older than 50, you’re eligible to make catch-up contributions, allowing you to save even more.

Start a splurge account

Forbidding “pleasure spending” is like forgoing dessert on a diet, said Alex Melkumian, a financial psychologist and the founder of the Financial Psychology Center in Los Angeles. “It makes it near impossible to stick with your plan in the long term,” he said.

To strike a balance, replace rigid rules with permission to occasionally indulge. Set aside up to 5 percent of your paycheck each month in an account you can use for splurges, Dr. Melkumian said. For instance, if you earn $5,000, save $250 of that money in an account that can be used toward something you enjoy. It might feel counterintuitive to give yourself a budget for such expenses, but with a sense of financial freedom, you’re less likely to revert to harmful spending patterns.

Invest in your future

When retirement is decades away, it’s difficult to imagine how money spent today can affect one’s savings years from now. But following a simple equation like the rule of 72 can help, said Judi Leahy, a senior wealth adviser at Citi Personal Wealth Management. Simply divide 72 by the annual rate of return; the result shows how many years it will take to double your money, Ms. Leahy said. For instance, with a 6 percent return rate, your money should double in 12 years. Had Ms. Colon invested the $10,000 she spent, for example, she would have had $20,000 when she turns 54.

Article source: https://www.nytimes.com/2023/03/03/business/shopping-spending-retirement.html