t’s not what you earn but what you spend that makes all the difference in what is left at the end of the day! The “latte factor” states that even small purchases add up to make significant expenditures over time.
If you spent $3.50 on coffee a day, that would cost you $105 in a month, $1,260 in a year and $37,800 over the course of 30 years. That is not all. The income forgone is much greater if you considered what that money would have grown, if it was invested over time.
The Power of Compounding
Small amounts of money invested regularly can turn into large amounts of cash. That is the affects of compounding – investing your principal plus the return on your principal – over and over again.That amount of $3.50 per day invested at 6% per year will grow to $105,000 in thirty years! This can be for any daily habit or incidental purchases you are making.
5 Keys to Budgeting:
- Keep track of every expense, including the small ones.
- Update your budget continually – by the month.
- Plan for both fixed and variable expenses.
- Plan for the unexpected. Having an emergency fund equivalent to six months income.
- Implement the 50/20/30 budget. Spend 50% of your income on essentials – housing, food & transportation. Use 30% on personal expenses like dining out, gym membership, and your cell phone bill. Save 20%
Most of us cannot do without coffee. Maybe, it is something else you can cut out from your expenses. Start by pairing down one expensive habit. The extra pairs of shoes you regularly buy that you do not need. This is a common one with many of my friends. The doughnut you buy with that daily coffee.
Small changes are more achievable than radical shifts. Whatever you choose to eliminate, stick with it. Whether it be eating twice a month instead of six times or cutting down the number of magazine subscriptions you currently have.
Have a Goal
We are more likely to adopt habits when we are clear about the outcomes we desire. Maybe it’s the downpayment on a home that you are saving up for. Or a trip to italy next summer.
Even after you’ve achieve the desired outcome, continue with the savings plan. Once you create a habit, avoid reverting back to what it used to be. Keep saving but save for a new outcome. Once you’ve gone on that trip to Italy, continue saving. Save for another outcome.
Open a new savings account. Program your exisiting checking account to transfer a set amount of funds to the new savings account each time you receive your paycheck. Paying yourself first is a great way to ensure you don’t spend what you’re trying to save.
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