Thursday, October 8, 2009

Two important ideas to help you save.

How many people have a daily coffee, energy drink, or some other beverage "fix"? I know at work I drink my fair share of coffee, and I'm sure many others do the same on a daily basis. How many people put the same amount of money into a savings plan for retirement? The number of hands probably just plummeted. The line I hear a lot is "I don't make enough to save!"

The thought you have to get into your head is "I have to make myself save."

If you added up the cost of a daily coffee habit, or energy drink habit, or tobacco might quickly realize where your money is going. Check out this calculator and play with the numbers a bit. You may be surprised to see how much you spend on your daily fix.

Imagine if you instead put that toward a savings plan...

If you saved that $2.50 a day by drinking office/home brewed coffee, you could end up with $75,000 after 30 years.

This is based on a starting savings of $0 with the $2.50/day for 30 days in a month which is $75/month and at a rate of return of 6%, and never increasing your contributions. (You could increase your savings significantly if you rachet up your amount as you get raises/bonuses/part time jobs etc.)

At the end of the 30 years you would have "spent" $27,000 on your "coffee" to end up with 75,000. With this example, by just drinking the coffee and not saving, your opportunity cost (which means what you lost by not saving it instead) is $48,000.

That's an expensive $27,000 coffee!

Hopefully this sounds good to you so far...let's add one more level to it.

What if you made that savings automatic? What if you had your bank account setup to automatically withdraw $75 every month and put it into savings? It's much less likely you would even notice the money if you set it up this way. This is why credit card companies allow you to put stuff on "auto-pay", and now you can use the same concept for your own savings plan.

Even a small amount per month can add up to huge $$$ after 30 years! The keys are to start early, save more, and make sure you prioritize your savings before your spending!

1 comment:

  1. So glad I don't go to Starbucks daily, and also glad I buy coffee when it's on sale! woot woot =)