- Personal Finance
Will cutting small purchases make a financial difference long-term?
A Penny Saved is a Penny Earned
Eliminating or reducing small unnecessary purchases can make a huge difference in your financial situation long-term, depending on what you do with the money. In his book, The Automatic Millionaire, David Bach recalls a seminar he gave about how to automatically become a millionaire.
His basic plan requires that you put away $300 per month for roughly 30 years. One young lady in the audience said that saving that much money every month was impossible to do; she was having a difficult time making ends meet and squeezing $300 out of her budget for savings would be impossible.
So Mr. Bach proceeded to ask her about her daily routine. She explained that she stopped at Starbucks for a latte and muffin on the way to work. Then at her 10 am break, she had a power juice. So her total cost before lunch was $10. By cutting out that $10 each day, she would easily have $300 per month to put into savings.
By investing $300 per month at 10% interest -- the average return of common stocks over the long term -- she would have accumulated over $678,000 in 30 years. In 35 years, she would have a net worth of $1,139,000. After 40 years of saving $300 a month, she would have $1,897,000, growing at a rate of $15,000 per day.
So, yes, if you reduce or cut out those small unnecessary expenses and invest that money, you can do very well for yourself financially. The key is compounding interest: the longer you save and invest, the more difference it makes.
We often spend on unnecessary things because we don't have specific, long term financial goals for our lives and we haven't developed a plan to reach those goals. It's not enough to say that you want to be a millionaire; you need to have a plan with specific, attainable steps that will get you to that goal. It's easy to indulge in short term gratification rather than long term well being when we can't see how sacrificing those little pleasures will provide a real benefit. But if you have a concrete plan, it's easier to resist temptation and make decisions that will help you reach financial security.
Cutting out those little unnecessary expenses and saving for the long term is one of the most astute financial moves a young person can make. Even for someone past their 20s or 30s, it is still the smart thing to do.
Skip the latte and muffin. Invest in your future.