If you have read some of my other blog articles, you know that I am writing a lot about saving money … which is one of the most underrated aspects of financial independence, in my view.
About a third of Americans have no or very little retirement savings, which reveals a major problem when it comes to financial independence: Most people simply don’t save money which makes F.I.R.E. an unrealistic dream for many. Maybe they can’t save any money because they live paycheck to paycheck, or maybe they have fallen on hard times. Yes, these cases exist.
More often than not, however, I think most people simply don’t know how to save money … a subject that I try to educate about on my blog www.retiredby35.com quite often. In a short-term obsessed, consumption-oriented society, it is indeed hard to form your own opinions, resist temptations and go against the flow. However, if financial independence is your ultimate goal, exercising self-control and being long-term oriented are key challenges to master on your F.I.R.E. journey.
I can’t tell you how often I have heard people say that saving small amounts of money is not important because they are expecting salary increases in the future. This contemptuous attitude towards money typically comes from people with NO savings, NO financial game plan, and NO financial goals. And quite the opposite is true: Saving money consistently is a pretty big deal, and, frankly, an absolute game changer.
Consider this example for a minute. Assume you spend $5 every day on, say, a coffee latte in your local coffee shop. If you invested the money on a monthly basis, $150/month, into an index fund producing 10% annual returns, you are looking at a potential portfolio value of nearly $300k after 30 years.
See for yourself.
Let me repeat: If you save just $5/day for 30 years, you are looking at an investment value of almost $300k … more than enough to buy a 3 or 4 investment properties.
This coffee example is just that, an example.
We all waste money somewhere, and it is typically small change that piles up pretty quickly.
I can give you another example to show why it is important to think long-term.
Are you using Netflix?
It’s just $13/month, right?
Here’s how much your standard Netflix subscription will cost you over 30 years.
Need yet another example?
Assume you are indeed the average American and make $500/month in car payments. How much are you going to waste over 20 years?
Here’s the chart.
All calculations assume a 10% average annual return, which is about in line with the long-term stock market return of the S&P 500. The calculation also assumes annual compounding frequency.
As you can see in all of the examples above, relatively small expenses compound out to quite impressive sums over time. If you just cut out your coffee habit, you are looking at hundreds of thousands of dollars in savings over time.
And, let’s say, you really commit to cutting back on wasteful spending and sock away $1,000 each month from age 30 until age 67, and invest the money into an index fund. Do you want to guess how much money will be in your investment portfolio when you retire?
Almost $4 million!
If you understand the math behind those simple examples, it will be MUCH EASIER for you to think long-term and delay gratification. Understanding the future value of money is KEY to making smarter financial decisions, and it makes it a lot easier to cut back on wasteful spending.
To Sum Up
Instead of thinking about a coffee as just $5, think about what you can do with the money if you invested it for 20 or 30 years. Focus on the long-term, not the short-term. Be a saver, not a spender. Prioritizing the long-term over the short-haul and understanding that saving small amounts of money consistently is a REAL game changer is absolutely necessary if financial independence is your dominant life goal.