Drink your Fucking Latte – Why a Small Budget Cut Won’t Add Up
I hate it when people don’t think before they speak.
Critical thinking is a skill that is sorely missing in this world. To not take something at face value and really dig into an argument to make sure that bullshit isn’t being spewed at you is a very, very important skill. And based on this upcoming election, one that is currently missing from American culture in general.
That being said, you’ll see a lot of the same advice spat out by most financial bloggers. “Spend less than you earn”, “Start saving as early as possible”, “Don’t use too much debt”, and so on and so forth. But one of the most dangerous things that I hear in the financial blogosphere is…
“If you make a simple budget cut by removing (insert random cheap item here) then you can have (insert a deceivingly large number) of dollars here by the time you’re (insert ancient number here).”
Christ, that phrase had more inserting than the REALLY exciting episodes of Game Of Thrones.
For example, “If you cut out a $4 latte everyday, then you can have $528,190,028 by the time you’re 103 years old!”
Budgeting is a part of any sound financial plan. Not just when it comes down to managing your household finances, but business finances as well. If you want to run a successful business, you’ve got to know where the money is coming from, where it’s going, and what an appropriate budget cut might look like. But this idea that you can make one small reduction and that’s what’s going to solve your financial woes is ridiculous. It has permeated personal finance speak and today I’m taking a stand against it. A mathematical stand. Here’s what I’ve got:
The Simple Budget Cut – Your $4 Latte
Alright, so let’s attack this logically. Let’s say on your way to being a rockstar at whatever your job is, that you spend $4 on a latte. You do that everyday of the working week. Man, $20 a week, that’s not a small amount of money. Let’s say that you develop this habit, but the moment you turn 30 you read something that says that you should stop doing that and save the money instead.
So that’s exactly what you do. You cut coffee out of your life and invest the money instead. You invest until your 65 (35 years) and you get a 9% return per year.
***crunches a bunch of numbers like a boss***
Right around $225,000! That’s a shitload of money!
Except… if you’ve read any of my other posts, you’re sure to realize the catch. It’s that bad boy called… inflation.
So that $225,000? After factoring a 3% inflation rate for 35 years, it’s only worth $80,000. Which mind you, is not a small amount of money. But you’re not going to retire on $80,000 of today’s dollars; it’s just not going to happen.
And here’s the thing that NO ONE EVER FUCKING TALKS ABOUT!!!
This is not a reasonable budget cut! There’s no way on earth that you’re going to NOT drink coffee every single day between the ages of 30 and 65. If you’re single, SOMEONE is going to want to meet you for a coffee for a little date. If you’re a professional, some starry-eyed college kid is going to want to take you out to coffee for an informational interview that he/she hopes will turn into a job offer by the magic of the Cafe Gods.
Either way, there is no world where you go 35 years without buying a coffee. And who knows just how many you’ll buy? That $80,000 is the ABSOLUTE BEST CASE SCENARIO IF YOU CUT OUT A LATTE EVERY DAY!
OK… But I don’t drink coffee…
Then let’s go with another pretty common thing to cut out if you partake in the terrible habit… smoking. At an average of $5.15 per pack, and the average smoker smokes roughly a pack per day (actually a little less, look here…) then the average smoker spends $36.05 per week. That means that the smoker could save $144.20 a month.
So if you’re saving roughly $1,730 per year, and you do that for 35 years at a 9% interest rate, you should have right around $400,000 when you’re 65. Again, the number sounds fantastic. But when it’s adjusted for a 3% inflation rate, you’re looking at $140,000 in purchasing power. Again, not too shabby, but you’re not going to be able to retire on that amount (remember what I said here about half a million dollars…)
Alright then, Paul. What would it take to make you happy?!
Well I’m still waiting on that house in Malibu and that job offer from Seth McFarlane (HINTIDDY HINT HINT SETH). But what sort of budget cut does it take to make a significant dent in your retirement? Well, keeping all the same assumptions (9% return, 35 years of cutting, and 3% inflation) I’d say that this is the number that you’d need to cut out PER WEEK:
Yep, that’s a pretty big number. In fact, I know LOTS of people that would scoff at saving that much money per MONTH, much less every WEEK. But if you save that much money per week for 35 years at 9% interest, you would end up with just under $1.2 million. That’s not a bad payday. Now, after inflation, that bad boy is only going to be worth $425,000. But that’s a pretty hefty chunk of your retirement nest egg.
So what’s my point?
My point, dear reader, is that you are NEVER GOING TO BE ABLE TO RETIRE BY MAKING A TINY BUDGET CUT!!! The math will never work out. Unless you’re going to make multiple cuts (no coffee, no eating out, no cable, no internet, live in a cardboard shack with some dude named “Slice”) then your retirement goals are not going to be met!
Do you find this slightly depressing?! I sure fucking do! I can’t count the amount of financial help books that perpetuate this, “Small budgetary adjustments can make you wealthy” mindset. NO THEY WON’T! THEY’LL JUST ALLOW YOU TO BUY FANCIER GUM BALLS OR SEE A MOVIE ONCE PER YEAR!
Alright, smartass, so then what’s the solution?
Clearly, the solution is not making small cuts to your budget in the hope that you might have enough money someday to do something fun. So what about something else?…
Get a Job that Pays Mucho – So this might seem obvious, but if you want to keep more money, the easiest way is to get a bigger paycheck. Pretty hard to do once you’re out of college and set on a “life track”, but if you’re still in school, think about what you can do to set yourself up for bigger bucks later in life. If you’re out of school, start thinking about grad school, or gaining some skills that might induce a pay bump (coding, anyone?)
Start a Business – HUGE proponent of this, as you’re hanging out at my “Place of Business” right now, but this is a huge part to cracking the code to riches in general. Start a business, own as much of it as possible, and watch the $$$ flow in…
Ok, so obviously it’s not that simple. But you can’t argue with the fact that half of all millionaires are entrepreneurs. And that number includes really old peep’s that pinched pennies till their fingers bled. If you want to be wealthy and young enough to enjoy it, get out and start a business.
Slice and Dice your Budget – There ARE people out there that do this, and frankly I just don’t understand how. There are loads of blogs out there written by those who save 50-80% of their income.
When you go on to read how they do it, they REALLY get down and dirty with excel and save every dollar possible. These people don’t make a budget cut or two; they hack away pretty much everything they don’t need to survive. We’re talking no new clothes, TV, books, cars, houses, toothpicks, ANYTHING! And most of these people only do this for a meager 10 years or so and eventually they can retire with the amount they’ve saved.
This is most certainly NOT for the faint of heart, and frankly, it would drive most people insane. Never eating out, never grabbing a beer, never traveling, no vacation. Plus, you might get through this for a couple months, but there’s no WAY most people can keep this up for years on end.
Fine, point made. So when IS a good time for you to make a budget cut?
So we’ve established that small cuts to your budget are not going to make you a mutha fuckin’ ballah with models and bottles to spare. But there are going to be 2 main appropriate times when it WILL make sense to cut some of your monthly expenditures down. They are:
- When you’re wasting it – Come on… come on… We all know you do it. That cable you pay for when all you watch is Netflix? That subscription to Spotify that you use 10x a year? Getting daily delivery of the Wall Street Journal? That monthly charge on your credit card to “Donkeyspaceshipbooboo.com”, which we ALL know is masking for something else? If you’re dropping cash on things you don’t need, or don’t use nearly enough to justify the expense, then just cut them. Not only will you be happier with the money in your pocket, but you’ll feel better that you have one less thing to take care of.
- When you’ve got a savings goal – When given in the context of trying to save for a fancy new pair of shoes or a flight to Dublin, $4 a day really starts to count. That $80 bucks per month could (after a few months) put a significant dent in your flight, or get you that pair of shoes. And the best part? YOU’RE NOT GIVING UP COFFEE FOREVER, WHICH NO ONE IS ACTUALLY GOING TO DO!
Drink your Fucking Latte – The Wrap Up
Alright, so by the great powers of math, numbers, and the internet, we’ve established a couple of key points that are useful to be sure you’re not wasting your time when it comes to saving:
- A small budget cut will never EVER lead to you having an awesome retirement. Also, human nature dictates that you’re not going to make a cut from your budget and maintain it for 30- ish years.
- If you’re looking to save for retirement on your own, then starting at $100/week is a much more viable option, and puts you way closer to retirement.
- If you’re trying to save for retirement, then you need to focus on the BIG WINS (better paying job, huge budget cuts, etc.) in order to get to your number on time.
What has been the most significant cut to your budget? Has it been hard to do, or surprisingly easy? Do you know of anyone who has been able to cut 40-80% of their budget? Comment below!
Keep trying to crack the code,