Small Choices, Big Difference: Part III

This is part three in a three part series. Here is part one and part two.

So maybe the “Latte Factor” is a little exaggerated. However, if you save a fair amount of money over a long period of time, compound interest can make you a millionaire. Are you not sure if you can save that much while you’re also having kids, paying for a mortgage, etc? Why not invest while you are young, single, or a young couple. Invest now, delay gratification, and you’ll be better off than delaying even one more year.

Let’s look at the numbers. Let’s say you commit to saving $350/month for the next ten years. Yes, $350 can be quite a bit of money for those just starting their professional careers, for students, for young couples getting married, but it is possible. It just means reducing your expenses, saying no to some things now, and you’ll gain the benefit for the future.

So $350/month ($4200/year) for 10 years invested at a relatively conservative 5% would mean that after ten years you would have $55,465. You’re still 30 years away from retirement, but you can’t afford to invest any more money towards your retirement, because you bought a house, are having a mid life crisis (new sports car), and your wife has decided that she needs to stay home with the children and keep them from engaging in competitive sports. When you retire, even without additional investments, that $55,465 (at 5% over 30 years) would turn to $239,716.

In comparison, you could spend the next ten years investing in your empty wine bottle collection, a leased car, and maybe a new Macbook. Then, after having kids and deciding that paying off your mortgage isn’t a priority, you decide to invest $350/month for the next 30 years until you retire. If you start saving when you’re 35 years old, if you earn 5% over 30 years, you’ll end up with $292,995, a whopping $53k difference.

Hey, you might be thinking to yourself, isn’t the second option better? Won’t I end up with more money for retirement? Well, perhaps. I would argue that the first option is better for a couple of reasons.

1. You would have invested less money for a greater return. In the first example, one would have invested $42,000. In the second example, one would have invested $126,000, 3 times as much. In the first example, their investments equalled 17.5% of their final total. The second example, 43%.

2. Cash available for retirement isn’t everything. Perhaps investing in retirement early resulted in being able to purchase a bigger house, increasing one’s overall net worth. You will need a whole lot more money for your retirement if you’re still making mortgage payments or if you’re still in debt.

3. What could you do with an additional $350/month for 30 years? Pay off your mortgage sooner, saving tens of thousands of dollars of interest? Pay for your children’s college education? Invest in your own education, or in a side business you’ve started, or a daily latte and lunch for 30 years?

The reason why I’ve written numerous articles on this subject is because I don’t want to be yet another 30 or 40 year old who regrets not investing or saving while they had time on their side. Yes, giving up lunch or a latte could suck for today, in the moment. I’ve given up buying lunch while I am at work (the only way I can really eat while meter reading), and it often sucks. The thing is, these pains are temporary. Soon enough, I am home and I am full of food. Soon enough, we could be old and full of regret. One of those I am okay with, the other, I am not.

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• Reasons Why we Fail to Save Part 1
• Reasons Why We Fail to Save Part 2
• Spending Less than you Make: A Key to Budgeting and Saving
• Wedding Expenses: Location, Location, Location
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