Have you ever heard of a theory called the Latte Factor? The theory goes that if you gave up your $5 a day Starbucks latte and invested that money over time you would reach a sizeable amount of money to help you achieve your retirement or some other wealth management goal.
Here is the math on this theory using one scenario:
While slightly coming to an amount over $72k that spans a 25-year period is nothing to snicker about, it is hardly going to make you a millionaire.
Here are some further assumptions that I used and why they aren’t likely to happen:
Bottom line, I see two major factors working against you; the ability to sustain a constant return over time and the discipline to save and not use the money over time. So if saving $5 on a latte or some other small daily or monthly expense is not going to make you a millionaire then what will? Paying attention to the “big stuff” might help you reach that millionaire dollar bogie.
So what are some examples of big expenses to look out for:
But just as important, here are some of the big items on the income side which could help you prosper:
While many people would like you to believe that by cutting back on the small things in life will get you to where you want to go in your wealth plan, that is simply poor advice. People need to focus on making the right financial decisions when it comes to big items in life. The issue is that many people spend more time analyzing the small items such as what big screen TV to buy or what smart phone to go with vs. spending more time analyzing how much you can afford on a monthly rent or mortgage payment.
At the end of the day there are two key tenants that will help you achieve a financial goal, save more and spend less. While return on investments play some role in helping you to reach a big financial goal such as retirement, these two basic ideas of saving more and spending less is what gets you to the financial mountain top. However, these two ideas are enhanced with the right financial plan and a strong discipline to follow that plan.
What I am Reading This Week
You’ve Bought a Small Business. Now What? (NYT)
Since the Recession, We’re Spending Again—But With Less Income (WSJ)
What are the chances of a recession? Not what you’d think (WP)
Smartphones Are Boring: Here’s What Happens Next (WSJ)