Spending Wisely The only thing standing between you and a comfortable retirement is your latte...
At least, that was common advice for years in the personal finance world. The idea is that if you gave up getting a latte at a coffee shop and fixed yourself a coffee at home – and dropped other daily indulgences like avocado toast – you'd go a long way toward fixing your financial woes.
But over the past few years, we've seen backlash to this advice from trendy "finfluencers" on social media that like to say you should just drink your fancy coffee because such changes to your budget aren't that important.
Here's the problem: Both lines of thinking are wrong.
Buying yourself a coffee every day won't make or break your retirement... But being generally mindful of your spending habits will.
Here's what would happen if you stopped buying a $5 latte every day and instead invested that money in the stock market...
We'll assume you earn about 8% a year (that's a little less than the historical average annual return on stocks).
At $5 per day, your annual latte cost would come to $1,825. That doesn't seem like a lot for one year. It's less than the average monthly mortgage payment in the U.S. Will that $5 make you a millionaire? The simple answer is probably not.
But if you invest that amount every year for 30 years, you'd be putting in $54,750. And thanks to the rising stock market and the magic of compounding, you'd have $225,106 in your portfolio. That's a much bigger chunk of change, and it means 75% of your total portfolio is pure profit.
That much money can go a long way toward a more comfortable retirement... whether that's going on nice vacations, taking care of family, or covering inevitable medical expenses without worry.
So does that mean you need to give up your latte?
No.
The point isn't that you have to give up your pleasures. It isn't that coffee costs too much. It's about making saving for retirement a priority and being aware of what you're spending your money on.
Just the other day, I was talking to Doc about how easy it is to ignore small drains on our finances...
Check out your banking statements each month. Is this a recurring expense that makes you wonder what it's for? Or something that you can remember the last time you used it? Like that gym membership you swore you'd use at the start of the year... or that monthly subscription to your third streaming service.
The key is to focus your money on what makes you happy without casually throwing it away on something you don't care about.
But when you're looking at your budget to see where your money is going, make sure you make saving and investing a priority.
How you save depends on what you're doing with that money... If you're just starting, prioritize having at least three months of expenses in an emergency savings account. (Make sure you're keeping your cash in a high-yield savings account to maximize the interest you earn.)
One trendy way to do that is the popular 100-envelope challenge. Every day, you put in enough money to match the number on the envelope. On day one, you'd put $1 in envelope No. 1. On day 10, you'd put $10 in envelope No. 10 and so on... At the end of 100 days, you'd have saved $5,050. That's nearly one month of expenses for the average American household.
But saving thousands of dollars in a few months isn't feasible for most of us. A better – and simpler – way to build up your savings is to make it automatic.
If your employer allows direct deposit, have your paycheck split so that a portion of it goes straight to a savings account. And every month, increase the amount a bit. Say you start with 2% of your income per paycheck, then in a few months, you up that to 3%. You won't feel the amount so much when you work in small increments.
Once you have your emergency fund built up, put that extra cash into the markets so it can grow faster... One of my colleagues likes to have a percentage of his pay directly deposited into his brokerage account, which automatically invests it in a fund that tracks the S&P 500 Index. Lots of brokerages – including Fidelity Investments, Charles Schwab, and E-Trade – let you make such automatic and recurring investments.
The important thing it to be mindful of your money...
If you buy that $5 latte because it's your life's pleasure, go for it. If it's because you're thirsty, save a few bucks for your nest egg.
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Here's to our health, wealth, and a great retirement,
Laura Bente, CFP®
August 15, 2024