How Small Spending Habits Can Impact Your Finances
Lessons From Lunch
A few years back, my colleagues and I got into a troublesome habit at work. We started eating out every week at a Chinese restaurant nearby and ordering the same meal - egg drop soup, a bento box of Pon Pon Chicken, and an egg roll. This ritual gradually became so ingrained in our routine that we measured our business performance not in profit or revenue but in the number of bento boxes consumed. It was then that I had an epiphany. I began to ponder the potential financial impact of seemingly small changinges.
To the Bank or the Belly?
Have you ever considered how much money you spend on dining out? Let's say you go out for lunch once a week and spend $11.54 per meal. At first, this may seem like a little. However, when you add up the numbers, you'll find that you would spend $600 yearly on eating out. That's a significant amount of money that could be used better.
Now, let's take this a step further. If you followed this practice for over 30 years, you would have spent a whopping $18,000 on dining out. Just think about that for a moment. $18,000 is a lot of money that could be used for other purposes like investing in your retirement or taking a much-needed vacation.
While it's easy to get caught up in the moment and indulge in some of your favorite foods, it's important to remember the long-term impact of your spending habits. By being mindful of how you spend your money, you can make better decisions that will benefit you in the long run.
While I don't want to discourage you from dining out, it's worth considering the trade-offs involved and recognizing the potential consequences of those choices. When you choose to eat out, you may be sacrificing other opportunities.
Contemplating Compound Interest
Imagine that instead of spending our lunch money every week, we had invested it in something that would yield a return over time. Have you ever wondered what the outcome would have been if you had invested the money rather than spent it? Let's say we had invested $11.54 at an 8% annual rate of return. After 30 years, our investment would have grown to $116.12.
That may make you think twice about the money you spend.
Regular Contributions
Suppose you had invested $11.54 every week and earned an average annual return of 8% over 30 years. In that case, your investment would have grown to approximately $74,000. However, this amount needs to be evaluated in the context of inflation. Assuming a 3% inflation rate, the purchasing power of $74,000 in 30 years would be equivalent to $30,487. While this amount is insufficient for a comfortable retirement, it is significantly better than the alternative.
Let's delve into how much income these hypothetical savings could generate. Let's assume we take the risk level down and have a rate of return of 4% annually in retirement. Under these assumptions, the $74,000 portfolio could hypothetically produce $4,200 per year or $350 monthly in income without adjusting for inflation or taxes.
It's important to note that we're not advising you to completely avoid dining out or implying that you can consistently achieve an 8% rate of return on your investments, nor are we suggesting that simply redirecting your lunch money will suffice for your retirement savings.
What we are suggesting is that even small amounts of money contributed to your 401(k) or IRA on a regular basis can accumulate significantly over time and make a substantial difference in your future finances.
The Effects of Inflation
Let's consider a scenario that involves inflation and how it affects the purchasing power of our money. Imagine you have saved $11.54 in your bank account or kept it under your mattress for 30 years. Now, the question arises - what is the actual value of this money after 30 years?
Let's assume that the inflation rate is 3%. Based on this inflation rate, the $18,000 we saved would only have a purchasing power of $7,416.59 compared to the purchasing power it has today. This means that the value of our money has significantly decreased due to inflation over time. It's quite an unpleasant realization!
Be Smart with Your Assets
The following hypothetical situations are designed to encourage you to reevaluate your relationship with money. The little things in life, such as dining out with a friend, add flavor and excitement to our daily routines. However, finding a balance between enjoying your lifestyle and being fiscally responsible is important. Considering these scenarios, you may discover new perspectives on handling your finances.
One way to increase your retirement savings is to reduce dining out and allocate the extra money toward your 401(k). Additionally, try to limit a daily coffee shop routine and view it as a special treat rather than a regular habit. These small changes can increase over time and help you achieve your long-term financial goals.
Saving money can be a daunting task for a lot of individuals. While it's essential to begin saving as soon as possible, selecting the appropriate investments is also crucial for attaining long-term financial objectives, particularly concerning retirement planning. Making wise investment choices can help ensure that you achieve your financial goals and have a secure future.
The Bottom Line
Although $11.50 per month may not be sufficient to save up for retirement, it's essential to realize that even small changes in our spending habits can significantly impact our financial plans. However, the example provided does not accurately represent real-life scenarios, as it fails to consider several factors such as taxes, recessions, and other unpredictable events.
It's crucial to remember that life is not a controlled experiment, and there are several variables to consider when making financial decisions. Nonetheless, this example can motivate us to make small changes in our daily habits to achieve our financial goals. Please contact us if you need any assistance, a second opinion on your retirement plan, or a wealth management professional.
CUI Wealth Management is located in Salt Lake City, Utah, and provides wealth management and retirement plan advising services to clients in many states. See the information below for details about the states we serve.