PERSONAL FINANCE MUSING 28 THE MAGIC OF SMALL SAVINGS- III THE LATTE FACTOR AND SIGNIFICANT PURCHASES
PERSONAL FINANCE MUSING 28
THE MAGIC OF SMALL SAVINGS- III
THE LATTE FACTOR AND SIGNIFICANT PURCHASES
We get on to the last post of our trilogy on the magic of small savings and how, when compounded over a long time, these can grow to a humongous amount. In the last two posts, we have covered the journey of tips on small savings including the interesting concept of “Gazingus Pins”, which was appreciated by many. For the sake of continuation, I am providing the links below.
Let’s begin with the “Latte Factor. The Latte is a metaphor made popular by David Bach in his book “The Automatic Millionaire”. The Latte Factor essentially refers to small but regular spending on things which appear trivial in the short run but counted over a period of few years/decades, have the potential to seriously impede one’s financial freedom. In the book, Bach talks about a woman who is fond of having a Tall Latte from Starbucks every day ignoring the cheaper alternatives available in her workplace. When counted over a decade, this seemingly trivial amount of $ 3-4 per day on Latte could have grown to a substantial sum.
The Latte is just a metaphor and we all have our own Lattes in life- a packet of cigarettes, bottled water, weekend movie with pizza, the list is virtually endless. What is needed is to pause and reflect upon your own Latte, which can be eliminated/ reduced in order to have a surplus amount available for investing or looking after your Needs. Let’s take an example of HoneyCool, a youngster, who is very passionate about watching a movie, followed by a glass of Beer and Pizza, every weekend. Of course he can afford it and of course, he has catered for this expenditure in his budget. This weekly fun outing costs around Rs 1,000 (movie ticket with coke and popcorn, a glass of Beer with some snacks and a double cheese Chicken Tikka Pizza et. al.) So, over a month around Rs 4000-5000 gets spent in this innocent activity.
Taken to an extreme if we assume that HoneyCool cuts down this activity completely and invests the money in a financial instrument which gives him a return of 12% over time (Diversified equity mutual funds have given this return over last 10 years). How much he has saved over the next decade- a cool Rs Eleven Lac and Twenty Thousand? How about over the entire investing lifetime of 35 years? It grows to a humongous amount of Rs 2.75 crore.
All right, HoneyCool is entitled to his share of fun and he must have that but suppose he decides to have only two Movie/Pizza weekends instead of four in a month and spends other two weekends watching TV/reading books/visiting friends or parents- possible? Even this small “Latte sacrifice” will make him richer by nearly Rs 1.4 crore, enough to buy a Pizza Hut outlet I guess. The idea I am trying to get at is that if one can cut down on small little expenditures without compromising the quality of life, the financial dividends could be out of proportion.
Another connected issue is of “Impulse Purchase” which we all experience from time to time. We are just looking around/window shopping in a Mall and Lo and Behold, find ourselves with a T-Shirt/Skirt/Nail Paint in our shopping cart. Of course, we never meant to purchase it, to begin with, but the “70% off” offer was too good to resist. One invariably gets stuck with things we could have planned to buy later, if at all. How to avoid it? Be very clear about your Want Budget for the month, maybe further divide it into a weekly budget and carry only that much in your wallet as cash. Absolutely no Credit/Debit Card for Want purchases. When the weekly Wants money runs out in the wallet, well, wait till next weekend. In extreme cases avoid going to such tempting places altogether unless you plan to buy something. For a detailed exposition on this “spending-investing” balance please read my posts of 07 and 08 Apr.
Even if something appears too tempting and almost a Need, should someone just buy it? It is better to give each Significant Purchase some time before you commit yourself into buying it. A “Significant Purchase” could be something which costs more than one week’s take-home pay- fair one I guess. So in case of HoneyCool, any purchase in excess of Rs 12,500 (assuming he earns Rs 50,000 per month) will fall in this category. And how long should one mull over before purchasing? At least the amount of time one would take to earn that amount. So HoneyCool should wait it out for one full week before buying something which costs upwards of Rs 12,500. If it is really a Need, buy after one week, but invariably, one will find the thing no longer appeals to you or you can think of better utilization of that amount.
Another trick is to have a long-term outlook in life- as you must always have, including your finances. So, if you come across something which costs Rs 10,000 and you feel you can afford it, fast forward 10 years (that’s thinking long-term). So, this “small” amount of Rs 10,000 has to be really perceived as Rs 30,000 by you (assuming ROR of 12%). If you find this item worth Rs 30,000, go ahead and buy it. Always remember, all your savings are current sacrifices for a good time in the future.
Hope this trilogy of posts about small savings and related concepts resonate with you and you find more innovative ways to save money. Please remember, frugality is not cheapness. You must ascertain what your passion in life is or what gives you pleasure and never scrounge from spending on that activity/item. But all others have to be ruthlessly eliminated/ reduced from your life- with our finite income; it is a zero-sum game.
My book, “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention is scaling new heights every day besides generating a buzz and having great sales. My book (paperback) is currently available domestically on Amazon.in, Flipkart, Infibeam and Notion press, and internationally on Amazon.com and Amazon.co.uk. The e-Book version is available on Kindle, Kobo, i-books and Google Books.
I am happy to announce that the book is now also available in major bookstores in the country including English Book Shop, Chandigarh, Rathee Media Centre, Jodhpur, Arya Book Store, Udaipur and Akanksha Book Depot beside other.
I was pleasantly surprised when one of the readers, Priyanka Sharma, clicked herself with the book at the English Book Shop, Chandigarh and graciously wrote a sweet comment. Her photograph and comment are here- God bless her with all the happiness and financial freedom.
I will urge you to continue to share this post too as my book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book. The link is given below.
Next week there will be no post due to some time-consuming commitments of mine, however, the week after that i.e. on 07 Oct, we will tackle some fun financial formulae which will tremendously add to our financial wisdom.
For now, enjoy your Sunday while reading my book- you have earned it.
This comment has been removed by a blog administrator.
ReplyDelete