Let’s start at the very beginning. Because, as Julie Andrews has been known to say, it’s a very good place to start. Everyone has been told since the dawn of time that they should be saving. Just like everyone has been told that if you want to lose weight you have to eat less. So we know what to do, why don’t we do it? My thought is that we don’t have a clear enough vision of what it looks like on the other end of the journey. What does it look like to save? And what is the money being saved for? And why can’t I spend it now on that awesome bag?
It all comes down to the first financial concept I ever learned, the one that actually got me hooked on finance in the first place. It’s called Time Value of Money or Lost Opportunity Cost. Let’s break this down because I guarantee that getting this will change how you think about money for the rest of your life. The simplest way to say it is “You can only spend each dollar you have once. And once that dollar is gone you can’t use it to buy anything else or invest in anything else or pay off anything else.” In other words you have lost all future use of that dollar.
So if I buy a grande soy chai latte at Starbucks (because it tastes like Christmas) for $4.98 I can’t put that $4.98 into my savings account. And it can’t grow over time. So that delicious jolt of caffeine cost me not only the $4.98 but all the future growth I am giving up also. Got it? Great! Now, here’s the rub. I’m going to buy many grande soy chai lattes from Starbucks over the course of my working years. (Again, because they taste like Christmas!) So let’s say that I were to have one of those 6 days a week for the next 30 years that comes out to $43,027 total dollars spent. But, let’s be honest, at some point Starbucks is going to raise their prices to keep up with inflation (a talk for a few pages from here). So let’s assume the cost of the SCL (soy chai latte) goes up 2% a year, that would mean I spent $58,175. But wait, there’s more! That is $58,175 that is never going into the bank and growing. So if my bank were giving me a 2% interest rate every year on all the money I had with them, not putting my SCL money there means I am losing out on $19,750 of interest for a total loss of $77,925!!
To sum up, by choosing to indulge in my SCL habit I would be forfeiting $77,925 of retirement savings.
Sounds pretty dire, no? May be. The truth is that without some sort of caffeine jolt once a day I may not survive to retirement. And I certainly wouldn’t be productive at 3 o’clock in the afternoon. And there we seem to be stuck. $77,925 seems like too much to spend on fancy coffee beverages but not working isn’t an option. As with everything else in life, it all comes down to priorities. And so I have compromised. With myself. And instead of rocking the SCL daily I now alternate in a Dunkin Donuts medium hazelnut with milk and sugar. And my total cost over 30 years is cut to $57,538. I’m saving over $20,000 just by switching out my caffeine beverage half the week. Now imagine what could happen if I would wake up early enough to make my own coffee!!
This is the impact caused by every dollar you spend.
So, why do you need to save? Because only so much money is coming into your world over the course of your life and you only get to spend each dollar once. Now or later. And if you spend it all now, there won’t be any left for later. One of my clients refers to her savings account as her “deferred shopping plan” and she couldn’t be more correct.
Make It Happen!
Track how much money you spend in a week on [insert your vice here]. Multiply by 52. That’s how much you spend on it a year. Multiply by 30. That’s roughly how much you will spend on it over the course of your working years. Ask yourself, it is worth this much to me?
As you go through the day evaluate everything you spend money on and really decide if it’s a priority for you. If it isn’t, don’t buy it and immediately transfer what you would have spent on it into a savings account. See how much you have saved by the end of a week.
Simply track everything you spend money on for one week. Categorize and see how much you spend on things you don’t consider a priority in your life.