Your Daily Coffee Habit Could Cost You a Fortune in Retirement, Warns Financial Planner
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Imagine the power of converting your daily latte into a substantial retirement nest egg. In the realm of personal finance, small daily decisions can result in enormous long-term effects, especially when it comes to planning for your golden years.
Your seemingly insignificant behaviors – the ones that silently eat into your wallet – could be the secret ingredients to a well-cushioned retirement.
What are some small actionable things one can do to save more money for retirement or feel more comfortable with their financial future?
I recently talked to a certified financial planner about how people can start thinking about the long-term financial impact of basic behaviors that add up.
Patrick Donnelly, a seasoned Certified Financial Planner (CFP®), Registered Investment Advisor, and Principal of Donnelly Financial Services, brings a wealth of knowledge in retirement planning, investment management, and pre-retirement planning.
Donnelly says the point of retirement savings is for your hard-earned money to work for you.
“I always say, “You work hard for your money, your money should always be working its hardest for you,” says Donnelly.
“So, sticking to this theme,” Donnelly asks, “What little things can we cut back on or change a little bit to drastically improve our financial wellbeing over time?”
The Importance of a Money Mindset For Small Financial Changes
Understanding your spending habits is a crucial first step towards effective saving.
“It’s about changing your psychology around finances,” says Donnelly. “Think in terms of opportunity cost. When you’re making purchases, big or small, think about what that money could be doing for you in a CD, an investment, a bond, etc. If we adopt this mindset, we begin to look at our spending habits differently.”
Being mindful of your discretionary spending is particularly significant. As Donnelly reveals, it’s often the small, frequent purchases – such as your daily coffee – that can have the most significant impact on your financial wellbeing.
These seemingly insignificant expenditures and guilty pleasures may undermine your ability to save big down the road.
“It’s hard to resist financial guilty pleasures,” explains Donnelly. “What I suggest is to pick one discretionary spending habit that you can easily live without.”
The Power of $40: Transforming Daily Coffee into a Retirement Fortune
Donnelly suggests thinking about going out for coffee, even though it “always gets a bad rap” in the personal financial world as a cliche often criticized, despite being a relatively benign and enjoyable daily behavior for many.
“Let’s say you spend $40 on coffee a week,” says Donnelly. In a big metropolitan area like New York City, Los Angeles, or Seattle, this isn’t outside the realm of possibility for many. On a personal aside, my locally-owned and operated artisan coffee shop in Southern California charges around $7.50 for a delicious – and very addictive – large cold brew.
“That’s $160 a month,” explains Donnelly. “In a year, it amounts to $1,920 annually. Now, if you think about the opportunity cost, what could that $1,920 be doing for us if it were going to a wealth building tool of some kind, like an investment?”
“Let’s say that the $1,920 was going into a Roth IRA each year,” Donnelly offers as an example. “Assuming a 10% average rate of return, after 20 years you would have $109,968. After 30 years, it would be $315,828. That’s tax-free money that can drastically change your lifestyle in retirement.”
Changing Financial Mindsets and Habits
Everyone has their own financial guilty pleasure. Going out for coffee is just one example of how the little things can add up and make an impact down the road.
Everyone has their own coffee: It could be stopping for an energy drink at the neighborhood gas station after work. It could be a weekly car wash, when you only need it monthly. Or lunch that could be packed or eaten at home instead of bought out. It could also be a subscription service you just don’t use frequently enough to justify the cost.
The trick is to cut spending on something that won’t rob you of a simple joy.
“We all have guilty pleasures in terms of our spending,” says Donnelly.
“If we start to think in terms of compound interest and about what our future self could have instead of a fleeting guilty pleasure, we can accomplish a lot.”
“Even a small change in behavior, like reducing your coffee consumption, can result in extra money to put towards your Roth, changing your financial habits and your future.”