Small Choices, Big Difference: Part II

This is part two in a three part series. Here is part one and part three.

So maybe refraining from a three dollar purchase can’t make you a millionaire. For a lot of us, we would rather choose a latte now than a million dollars later, anyways. So what’s the point? Why even bother saving? Why not just buy and buy and buy now while we’re young and enjoying life?

Let’s say that we decide that we want to buy, on average, one latte and one meal five or six days a week. On average, let’s say, that works out to about seventeen dollars a day, five days a week. So over a lifetime, from our early twenties (let’s say 25) to retirement age (let’s say 65), that would work out to about $179,520. That’s not so much money, you might say, because in Vancouver that’s hardly even a down deposit on a condo, let alone a house.

Now, let’s say that instead of buying lunch out everyday, you took that seventeen dollars and put it into some sort of savings or investment account. Let’s also say that we could earn, over the forty years that we save this money, an average of 5 percent. Sometimes we earn more, like in the stock market, and sometimes we earn less, like in a high interest savings account, but over 40 years it averages to 5%. Over that same forty years, that $179,520 would turn into $569,256.

So what am I telling you? That after forty years, after inflation and the rising Vancouver housing market, you could almost afford a small condo when you’re ready to retire? Well, yes and no. I think there are a couple of principles we can learn from this.

1. Using this example, the difference between the $179,520 and the $569,256 is a difference of $389,736, which is close to 70% of the total. So use different numbers if you’d like, raise or lower the interest rate, the amount you’re investing yearly, etc. The point is, compound interest, or, the next 40 years of your life, could amount to 70% of the money you’ll have when you retire.

2. The point is not that a daily latte is bad. In fact, if you want to spend a couple of grand each month eating out, or buying DVDs, then by all means, go ahead. The point is that you must realize that any money you are spending now could be a LOT more money later.

3. If you use the example above, the $17/day works out to about $350 a month. That’s not an extraordinary amount of money, and might be possible for a number of individuals and couples. The 5% is relatively conservative. It would require some investment in the stock market or the discovery of some other medium-high risk investments, but is quite possible even for a conservative investor. One could easily get a much higher overall percentage. If you want to be a millionaire, save $500 a month @ 7% annual return rate. You’ll end up with 1.28 million in 40 years.

Does that give you any motivation to cut out the daily latte, or lunch?