Does what we spend, even seemingly modest amounts, have an impact on long term financial goals? You betcha it does. I have often criticized the $4.00 coffee and $200 tattoo spending and more, but I never attempted to quantify the possible impact. Here is someone who has done the math.
Check it out! Read the full article on the HumbeDollar link below.
It’ll Cost You Sanjib Saha | October 15, 2019
IT’S IRONIC that we often shortchange retirement savings during the first half of our working lives, because that’s when we can buy future retirement dollars at a huge discount—thanks to investment compounding. How can we hammer home this point?
My proposal: We should adopt a simple mental math rule that allows us to weigh today’s spending against future retirement dollars. That brings me to my ”6 to 2 times 200” rule. The rule covers five age groups: early 20s, late 20s, early 30s, late 30s and early 40s.
The first part of the rule—the “6 to 2” part—gives the compounding factor for each age group. For instance, the compounding factor is six times if you’re in your early 20s, five times if you’re in your late 20s, and so on. As you grow older and enter the next age group, the compounding factor drops by one. What does all this mean? Each $1 spent by folks in their early 20s means at least $6 less in retirement spending. Similarly, $1 spent in your early 40s means at least $2 less in retirement.
Admittedly, the rule is only an approximation. Still, with any luck, it’ll help us to pause before spending. For instance, it will make a 27-year-old realize that switching to that shiny new $1,000 iPhone could cost as much as $5,000 in retirement spending. Is it worth effectively spending $5,000 on a new phone?
Our 27-year-old may still decide to switch to the new iPhone. After all, we all make bad spending decisions and we usually get away with it, provided the bad decisions aren’t too frequent or too costly. Instead, the real damage often comes from recurring expenses—the monthly magazine that no one reads, the extra property taxes for the bigger-than-needed house and countless similar items.
Source: It’ll Cost You – HumbleDollar