How to contribute to your retirement every day, for the cost of a Starbucks drink.
One of the essential principles of investing, which cannot be emphasized enough, is to invest early, regardless of the amount. One can never start too early, and there is a tendency of investments to increase over time, not necessarily linearly, but upward nonetheless.
The fundamental definition of investing is giving up something that is good NOW, for something that you HOPE will be better in the future. It takes a leap of faith on a lot of fronts and reminds me of the classic children’s story of the Three Little Pigs. While it may be easy to invest in the short term, like the first little pig who built his house of straw, or maybe put in a little bit more effort, like the second little pig who built his house of sticks, what will truly weather the storm is hard work and careful thought and planning, like the third little pig who built his house of brick. You want to be the hardworking third little pig, who was building something solid for the future.
The earlier you invest, the longer time the investment has to gain a return.
To illustrate, here is an example with the following simple assumptions:
1. You currently buy 5 Starbucks drinks a week, each costing $4.35 (including sales tax)
2. As of right now, you are 45 years away from your planned retirement date
3. To eliminate income tax rate discussions/distractions, we assume you can contribute to a Roth type investment account (using after tax take home pay, just like the Starbucks purchases)
4.To eliminate assumptions for inflation, we are using a constant price for Starbucks and a relatively low annual rate of return on investment
5. No potential employer match, this is just your elective contributions to your retirement plan
Let’s run the numbers, if you were to “re-invest” your Starbucks habit:
According to the CNBC, half of families have no retirement savings, and the median retirement savings is only $5,000. For those who do have retirement savings, the median is $60,000…which is still pretty scary. Considering these low median amounts, the sacrifice of giving up Starbucks doesn’t seem that daunting compared to the growth potential of reinvesting those funds.
My point here is that, whether it’s giving up a few Starbucks drinks, dining out, or a movie theater ticket here or there, and reinvesting it into your future can have major benefits. If you plan to “pay yourself first” and only save what’s “left over” you will save nothing.
I urge everyone to maximize their retirement savings, take advantage of employer match, and consult your personal financial advisor and/or 401(k) investment advisor for more details and a personalized analysis.
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