Take Care of the Pennies and the Pounds Will Take Care of Themselves
A Penny-pinching article by Glenn Baker, Principal of Adept Financial Planning Pty Ltd
If you had a Grandmother like mine, you will have a never ending supply of timeless sayings that are more often than not worth looking into for their inherent wisdom that lies within.
The title of this article may be a little more contemporary if we said 'take care of the cents and the dollars will take care of themselves', however that would rob it of some of the ageless charm.
The practical application of this saying is to remind people to watch their small spending. For many people, perhaps the majority, they are careful on their big expenditure, but rather carefree on the small, somewhat meaningless spending. Of course, we should be careful on both fronts, however most people tend to be wiser with 'the big stuff' and more frivolous or ambivalent with the small stuff.
I'm a Financial Planner, which makes me slightly peculiar for a number of reasons, but mostly due to my interest in musing on things such as this…and my natural starting point is to deal with the arithmetic (after all, if you can’t spreadsheet a problem, then how can you possibly solve it! I know what you are thinking…my poor wife!). So let's give that a try.
Two of the most common items people spend money on without thinking are coffee and lunch while at work. Don't get me wrong, I am quite partial to a nice coffee and a ham and cheese croissant.
By now you may be thinking it is a rather boring little blog thus far, that I will say that you should not spoil yourself and instead save the money, blah blah blah…so allow me to put some flesh on the bones, to make it a little more applicable.
Let us assume that the average cup of coffee from your local cafe sets you back $4. You purchase this every morning, and you buy two on Friday, after all its Friday right! That will set you back $24 each week. Does not sound like a lot really....but stick with me on this.
In addition to the coffee, you also purchase lunch from the local sandwich bar or hamburger joint for $8.50. You splurge a little more on a Friday Lunch, after all again its Friday right, and on that day you spend $14.95. That's a total of $48.95 each week. Similarly with the caffeine spend, it does not sound like a great deal of money necessarily.
This is where it gets interesting. For those coffee-sipping, sandwich-munching people who make this their daily staple (which from my observations is much more the majority rather than the minority) that is $72.95 per week. Not a lot of money, a boy/girl's got to eat right?!
Now we unveil the beauty and marvel of compounding returns. In order for us to make a meaningful study, let’s assume that instead of purchasing these items (you bring your own sandwich and suffer the office-kitchen coffee) you invested the money each week and received a rate of return of 8.5% per annum on average. Let us also assume that you are 35.
By the time you retire at age 65, the pay-off for going without the take-away lunch and morning coffee will not only be a 'healthier you', but you would have amassed over $470,000! ($471,196 to be precise). Now try and tell me it does not sound like a lot of money.
To account for inflation and to bring that back into today’s dollars, for those financially-nerdy people like me who want to know the current purchasing power of that amount of money in today's value, that is the equivalent of $224k today! In other words, a brand new V8 Land Cruiser and a 20 foot luxury caravan upon retirement (or a couple of years in Europe...whatever tickles your fancy). How much do you really enjoy that lunchtime sandwich and morning coffee now?!? Those Vegemite and cheese sandwiches are starting to look a little more attractive aren’t they!
Glenn Baker is the Principal of Adept Financial Planning, a Brisbane-based Financial Planning firm dedicated to providing professional, holistic Financial Planning advice.
About the Author
Glenn Baker is a Certified Financial Planner, and the Senior Financial Planner and Principal of Adept Financial Planning Pty Ltd, a Corporate Authorised Representative of Capstone Financial Planning Pty Ltd (as of 02/08/2019), AFSL 223135, ABN 24 093 733 969.