$39K on Milk and Espresso? Think Again.
One of the most common concepts in the world of personal finance is the Latte Factor. Personal finance expert David Bach suggested that if you forgo your daily latte, and bank the money instead, it could really add up over time.
It’s not just about the coffee, either. The Latte Factor encompasses all of the small, unnecessary spending that can drain away your wealth over time. If you stop spending on the small and unimportant things, and invest that money instead, you could see significant returns over time – enough to be rich.
How Much Could You Save with the Latte Factor?
What if you spend $5 each weekday on coffee, or some other small treat? What if, instead, you take that $25 a week and invest it a 7% annualized rate of return? You can use one of the many Latte Factor calculators on the Internet to discover that, after 30 years, you will have spent $39,000 on coffee.
But that’s not the only expense. You also have to consider the amount of interest you lost out on. In this case, you would have earned $93,163.52 in interest. That’s not bad for $5 each weekday. The idea is that if you take all of these little savings, and add them together, and then concentrate on using that money to make more money with the power of compound interest, you really could see some real savings.
What if You Focus on the Big Stuff?
It is possible that, if you could find a way to save, on average, $8 each day by avoiding small impulse purchases, and taking other small steps, and you could invest that money over the course of 30 years at 7%, you could earn $209,144.95 in interest.
But, what if, instead of pinching pennies and saving $8 a day, you looked for some of the bigger expenditures to cut. What if you could save $150 a month by cutting the cable? What if you shopped around for insurance to save another $60 a month? And what if you could save $200 by refinancing your home. Those three actions, combined, amount to $410 a month – or $352,588.11 in interest over the course of 30 years with 7% annualized returns.
The more you can set aside now, the more you will have later.
It’s Really about Priorities
Ultimately, though, it’s about priorities. What do you want to spend your money on? What’s most important to you? For some, it’s more important to save on the big things, but still retain the small pleasures of life. Others like the idea of cutting out small and unnecessary expenses to see big results.
Determine what you want your life to look like now, as well as in the future. What changes can you make to ensure that you are making spending decisions that are consistent with what you want out of life?
Small changes really can add up to something significant over time, but the most important thing for you is to decide what you want – and then use your financial resources to help you reach your goals.
Another awesome guest post written by Miranda, a freelance writer and professional blogger. Her blog is Planting Money Seeds.