By Stephen Jones
Last week a client brought me a book by David Bach titled "The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich." In his book, Dave refers to what he calls "The Latte Theory." He describes a situation where a woman approached him about saving for retirement. The woman stated how she couldn't possibly save for retirement based on her current financial situation. She was afraid she would never achieve her financial goals, a common fear that many people have. As a fellow advisor, David began to dig a little deeper into the woman's life.
David wondered about her morning routine. Does she make any stops? Or go straight to work? She tells David that she likes to stop for coffee each morning and that sometimes she may go back for more after work with a friend. He determined that she spends, on average, $5 for a latte each morning. Here's my favorite part, the math:
$5 x 2 = $10 a day
$10 x 30 = $300 a month
$300 x 12 = $3,600 a year
If you were to invest that same $10 each day, that's $3,600 a year for 40 years; you would end up with $932,603.47 in investment assets. Over the history of the stock market, the average return has been about 10% even though it varies significantly from year to year. For this example, we chose an average rate of 8%.
The point isn't about lattes or even coffee. It's about being human and the daily habits that we form. Some of these habits we might not even notice. Stopping at a famous coffee shop on the way to work may be second nature to some people. Eating out at a popular food chain for lunch, maybe another. There's nothing wrong with getting a latte or a hamburger now and then, but realize that you could save that money and have a significant impact on your financial goals.
Here are five key lessons that you should consider:
Compounding:Investing a small amount of money over time can turn into a sizable pile of cash. Cash allows you to purchase those more significant ticket items in your life. We can also use money as leverage for a new home or to start a business. Compounding means that each dollar you contribute may generate interest, or grow. That interest can then generate more interest, and so on. Compounding starts slowly but builds momentum over time. In the long run, compounding can have a big impact on how much you have at retirement. That’s why it pays to save as much as you can, as soon as you can. A financial planner can help determine how much you need to save on a monthly/annual basis.
Time:Time has a significant impact on your investments. Invest in long-term goals, not overnight wealth. Thirty years in the stock market versus ten years can make a huge difference. Think of that next time you consider investing after paying off debt.
Habits:Some people will say, "Life is too short," "you only live once." While these cliches have some truth to them, I have a different viewpoint for you to consider. That latte will only bring you instant gratification, not long-term happiness. My point; we spend too much money on things that don't make us happy. I'm guilty of it myself.
Control:You have control over your finances. Many people think they don't and accept it as a way of life. That's not to say that things don't happen in our lives. But the Latte Theory shows that we have more control than one may believe.
Small Amounts Matter:The power of small amounts and compounding allows anyone, no matter what their income level, to build wealth.
Note: Past performance is not an indication or guarantee of future results.
I hope this blog post brings new hope into your financial life and helps you realize the power of small investments. Just remember that you can build wealth and have a meaningful retirement.
Schedule a meeting with me: https://stephen-jones-1127519.twentyoverten.com/schedule-an-appointment