Now I’m sure we’ve all heard the old saying, “It takes money to make money”. While there are some exceptions to the rule, in the realm of personal finance and investing this is largely true. I imagine your reaction to this statement may go along the lines of, “Save money?! Easier said than done!”. While I agree in that saving is not easy, it’s not as bad as you might think when broken down into small enough pieces.
Start by thinking about your average day. What is the typical routine that you try and follow? Do you grab a coffee in the mornings or eat out at lunch? Or maybe you go out with friends or family during the week for dinner. When events become routine they are often easy to overlook; especially when trying to budget yourself.
I am a firm believer that momentum is key, especially when it comes to managing your finances. Think of it like working out. The first day into your new routine, you may push yourself harder than you anticipated and wake up too sore for the next day. This may hurt your motivation causing you to skip the gym for the next few days. Had you taken the “slow and steady” approach, you could be making small progress each day, compounding on the achievements of the previous day. We’ll go through an example to illustrate the point.
In an attempt to start saving, you drastically start cutting back on the lifestyle you currently maintain. You begin cutting back on things and events that you normally never thought twice about. By the end of the week, you may feel disheartened and resort to spending more money on the weekend than you had anticipated. To be clear, we all have those days where we spend more than we would like. This doesn’t make you a bad person by an means – it just makes you human. For starters, I recommend keeping things simple when you begin your new budget. Start small.
Instead of making draconian cuts to your lifestyle, first identify the low-hanging fruit; purchases that you could replace or eliminate without necessarily giving up much. This purchase could be as simple as your morning coffee on the way to work. Instead of buying this on the go, try making it at home and bringing it in travel mug. Another solution I like to use is bringing a K-Cup to work, provided where you work has a Keurig machine. Though this may seem like a small change, mastering this one decision can build momentum in your resolve to adjust your budget & lifestyle. Once you feel comfortable with your first change, begin to look for others that can easily be replaced. This momentum will allow you to continually improve your budget and grow your savings.
Now to frame the savings from one morning coffee a day, we need to make certain assumptions. Let’s say the cost of the average cup of coffee $2.50 while the average cost of your K-Cup is $1.00. If you repeat this each morning, Monday-Friday for an entire month (4 weeks of work), the result of your savings would be $30 while if you repeated this for an entire year it would be $360. Assuming that $360 was invested and grew at ~7% per year for the next 30 years, you would have ~$2,740 at the end of year 30. Keep in mind, that is only assuming you drink K-cups for your first year and invest those savings in the market. Should you continue to drink K-cups, year-over-year, consistently placing those savings in your investment account, you can imagine that nest egg over 30 years only increases.
The key factors in this hypothetical scenario include 1) The price of your cup of coffee, 2) The amount of days in the month that you stick to the plan, 3) How long the money is invested, 4) The rate of return you assume for your investments and 5) How many years you stick to this plan.
The big point here is this: small changes, if consistently practiced, can yield greater than expected results. My question to you is simple; what will be your first change?