In this addition of My Money Blog (Yes – That’s right, I’ve been watching too many episodes of MythBusters lately on my instant Netflix cue), we’ll discuss a topic that I learned in the very first book I ever read about personal finance and frugal living, David Bach’s “Automatic Millionaire.” I would definitely recommend you order a copy of this book used from Amazon. I’ve provided the link below if anyone is interested! You can’t beat Amazon – $0.94 for a great book! I love it.
One of the best topics David introduces in this book is the idea of a “Latte Factor.” The idea behind this is that for people that buy a latte from Starbucks everyday for $3, this compounds to a lot of money over time. The same can be said for all sorts of luxury purchases made everyday. The article from MSN below summarizes some of these additional purchases to think about.
10 Expenses that Add Up Fast – MSN Money Central
So what’s the big deal? Why is spending such a little amount of money every day a bad thing? Doesn’t it enhance my life? Well, the bad news is that if this money was instead saved and invested for the long-term, the miracle of compound interest will kick in, and you will have a lot of money by the time retirement comes.
The website from MSN gives 10 examples, but let’s take my two favorite ones because, well, I’m writing this blog, and get to do what I want to do. 🙂 Just kidding.
Finding Your Latte Factor – Buying Coffee and Lunch Every Workday
According to the MSN website, the average cup of brewed coffee costs $1.38 (this seems a little low, but OK). This would translate to $360 per year to buy a cup of coffee every workday. The average lunch during the workweek costs $9 (this seems a little high, but I just spent $11 on lunch today for a sandwich and salad at my company’s cafeteria because I forgot to pack my lunch). This would translate to $2,340 per year to buy lunch every workday.
Adding these two numbers together results in a sum of $2,700 per year for lunch and a cup of coffee. This is getting to be a lot of money!
Applying the miracle of compound interest, let’s assume you start work when you are 23 y.o, work until you are 65 y.o, and take the $2,700 you save by NOT buying coffee and lunch each day at work and invest it in a small cap value index mutual fund with a historical return of 12.4%.
Doing the math, this translates to a nest-egg of $2,930,299.20 when you retire at age 65. Wow!
What’s the take-home message here? Well, first, probably you should try to bring your lunch more and brew your own coffee at home! But, honestly, it’s not that you should eliminate all purchases in your life, but just to be mindful about recurring ones that you may not think are costing you that much each day.
Keep on learning!
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