Pennies Add Up to Millions

Here's a post from Yahoo Finance that details the author's struggle with her husband to take his lunch to work. But the essence of what she says is really that saving/watching your pennies is the key to wealth. Her thoughts:

I'm convinced that for the average person who wants to build wealth, pennies count.

Pennies have a funny way of snowballing into dollars, and then hundreds, and then thousands, especially if you use them to buy the stocks of well-managed companies. Consider the story of a parking attendant who earns $20,000 a year but has amassed a $500,000 equity portfolio. Or the one about a group of New Yorkers who managed to save for a down payment on a (very expensive, very tiny) piece of the Big Apple. Or the clan of seven dubbed "America's cheapest family," who paid off their mortgage in nine years on a salary of $35,000 a year.

I've seen article after article bashing David Bach's "Latte Principle" -- the idea that if you save on small spending you can amass a large amount of wealth. The main argument against it is that people should be paying attention to large expenditures -- that's where the real difference is made. But Bach isn't saying to ignore the expensive decisions in life. He's just aware that for many of us there are small amounts we spend every day without really thinking about how much they end up costing us. And that if we just limit a few of them and save that money, we can save a good amount throughout the years.

For instance, only $5 a day over 40 years and invested at 10% yields almost $1.1 million. Is your daily Starbucks coffee worth a fully-funded retirement when you can drink a cheaper version of the same thing that costs a fraction of the price? This is the heart of what Bach talks about.

And this is the heart of the post highlighted above -- a belief that I agree with. No, I'm not saying that you can't spend on luxuries or other things that make life fun/worth living. Who would want to live that way anyway? But I am saying that we all have some little bit of spending we could do without and if we do choose to do without it, saving and investing that money can add up to a big sum. Especially for those of you who "don't have any money to save," this could be a small step that could change your financial life.

Don't believe me that you have some small spending you could do without? Here's my challenge: keep a small notebook with you for a month and write down EVERY financial transaction you make in it. Every dollar spent by check, cash, or credit card -- everything. Once the month is over, you'll be amazed where your money went. (Most people who've done this can't believe the results.) Then you'll have a list of where you may be able to cut a bit of spending so you too can end up with $1 million or more at retirement.

Comments

[beastlike]

We only hit up Starbucks once, maybe twice a week and noticed the huge savings!!!! What a rip...

[Rob Lewis]

It's great, simple advice. I'm trying to track all my spending this month using Expensr (http://expensr.com), and once I've managed that (not always as easy to remember every transaction as you may think), I'll se where money can be saved for next month.

[Lord]

Since I have tracked my expenses, all my expenses (no misc for me), for decades, there aren't any savings to be had for me, but I continue to do it simply because I want to know where I am and how I got there. It takes me only a few hours a year to total everything up but it provides a lot of satisfaction being in control.

[MikeG]

Not to be a jerk, but saving $5 a day for 40 years would leave you with $977,888.35 - not near $1.1 million. That's based on saving $5 a day, compounding daily, using a daily yield of 10%/365 days. I know that's still a ton of money, but these cost-cutting articles should have accurate projections. How did they arrive at just under $1.1mill?

[Zook]

I'll play Devil's advocate for a second...

Just allow me to throw this out there...

This week I got a bonus of a few hundred dollars, with my Roth all set for the year [don't have a 401k] I just sent in $200 to my brokerage account and will probably end up putting another $50 or so by Wednesday on top if nothing comes up.

So, IF I want a Starbuck's coffee with a client for $3.88 on a couple days this week, should I feel guilty? Or should I say to myself, "Zook, this is a treat for putting $250 into your account this week and go ahead, drink the $8.00 sans guilt."

There comes a point where penny pinching can go overboard and this comes from a frugal penny pincher. I think when you are saving 25+% of your income, paying extra to the mortgage and paying down the car note early, enjoying life is a MUST. If that means enjoying a $4.00 coffee, than so be it. I mean, what's it all for anyways?

Now if you are in debt up to your eyeballs than you need to come to this site more often for tips and don't know what a 401k is and live paycheck to paycheck, then I guess this type of article needs to be read to you until it seeps into your brain, but I always feel guilt when I read this type of piece [which is well written].

I always ask myself, should I be saving $258.00 this week? Or is $250.00 'OK'?

[xshanex]

Zook is right on with being the devil's advocate. I read a variety of PF blogs and do a lot of other reading in my spare time and am almost reaching a burnout point with some people trying to extract every last penny from their budget. The majority of people I see have unhealthy relationships with money with most tossing it around and spending it without having any idea where it all goes. These people get lots of "money satisfaction" in small doses from a wide variety of spending in the short-term with little thought to debt and the long-term implications. On the far end you have a minority of super savers that pinch every penny and are obssessive about money and get their "money statisfaction" from saving, investing, and not spending money in the short-term. I wouldn't want to be one of either and try my hardest to find a balance in the middle. There is a point of diminishing returns with saving and investing when it comes to the happiness that the money can bring in the long term vs short term.

If people are earning as much as they can, have the schooling they need/desire, are out of debt, have an emergency fund, have a decent savings, max out their 401k/IRA/529, and are living relatively frugally and sensibly for their income level then I hope they spend the rest of that money on something that they absolutely enjoy no matter what it is and don't feel a second of guilt about it. If that $5 coffee a couple times a week brings them a lot of satisfaction then more power to them. People need to have their "thing" or even a couple "things" which they spend money on and get tons of enjoyment out of. I work really hard and have sacrificed a lot to make a decent living and save/invest while living pretty frugally. The money I have left over in my budget is spent however I see fit in a way that gets me maximum "money satisfaction" through experiences and/or possession. For many things there is no replacement for something that requires money.

I'm just hedging my bets in life...the overwhelming odds are that I'll live a long time and need the $ later on and I'm prepared for that but at the same time there are still very small odds that it all could end real soon and I'd be happy that I spent some of my money now and really enjoyed it

[FMF]

Zook and xshanex --

Did you miss it where I said:

"No, I'm not saying that you can't spend on luxuries or other things that make life fun/worth living. Who would want to live that way anyway? But I am saying that we all have some little bit of spending we could do without and if we do choose to do without it, saving and investing that money can add up to a big sum. Especially for those of you who 'don't have any money to save,' this could be a small step that could change your financial life."

[Kevin]

I agree that there are always ways to cut back, but to me it is worth it to occasionally splurge on little things like Starbucks or going out to lunch to keep myself sane. I'd rather walk the line of enjoying myself now and saving some dough along the way than living like a robot until retirement.

[FMF]

Kevin --

I think you hit the nail on the head with one word: occasionally.

[Zook]

FMF...

I caught that and I agree to a point...I always agree to a point with many things you write about as it has a very solid foundation. I don't know what it is with the latte factor, but it always gets a rise out of me.

When you write, "I am saying that we all have some little bit of spending we could do without", I just wonder how far that can go. Honestly, I feel guilt when I read these articles and for a 20-something saving his tush off who takes things literally, where IS the line? I mean using my example, that $8.00 a week could turn into a million dollars in 40-years if saved, but what about all of the other savings I do? Sometimes I feel we, as a community, know to much. It is hard to enjoy a latte for $3.75 when you know that, if saved, that $3.75 will be $29.89 in 40-years or what have you.

I know its something I should know about myself, but in one breath to hear, "Go ahead, spend on luxuries" and in the next a "but" and "we could all spend less", I honestly think the slope goes down to living poor and saving everything.

I always wonder about Bach and his latte factor...What is the example he used for the latte factor? Is it the person doing many things right and THAT person should save the $3.00? Or is it the person doing many things wrong and to get them started, they should save the $3.00?

I honestly don't know and for that reason alone, "the latte factor" is flawed in my mind.

[Lord]

I never thought it was about spending at all. I thought it was about seeing that you were getting the most value out of what you chose to spend and that most people have things they value more than a latte but aren't addressing. I thought it was about focusing on the big things we really want and not throwing money away on little things that aren't very important.

[Zook]

Lord...So enjoying a latte should be avoided and stopped in order to take that vacation? You are really hungry and need to hit the vending machine for an .80 cent snack, but your brain tells you, "What about retirement."

There are many folks that take it to the extreme. I read Bach's book [two of them] and found myself confused by the concept. It may help others, but to me [and not to seem elitist] it's a tad under me. And if it's under me, I feel the concept has issues and holes.

Again, if you get $8.00/week in coffee and are saving like a bandit, is the suggestion to NOT have the $8.00 coffees? Is the idea to cut back to $4.00/week and "invest" the $4.00? Or is the idea to eliminate the coffee? Where does it end and simply enjoying life's smaller pleasures begin?

Like I said before, you tell someone to save money and SOME will run with it to extremes. Like ME.

Listen, internet is sometimes tough to discuss things and I think this may be on of the times. This would all be better over a beer/soft drink and some pot-stickers :o) Good discussions folks!

[Lord]

As I recall, some in his book were saying, I can't afford to save, I can't afford to invest, I can't afford to buy a home, I can't afford to retire, and he was saying maybe you can without realizing it and without a lot of trouble. The only point of saving is spending, if not now then in the future. Savings is just the means to future spending. Now he really doesn't cover the spending part even though in the end that is all it is about, he doesn't really get into goals other than home ownership and retirement, nor does he really deal with priorities and tradeoffs although implicitly that is what I interpreted the Latte Factor to be about, tracking spending and seeing if you are satisfied with where the money is going. Decisions are something all of us have to make every day of our lives, but at most he asks us to do it consciously, not habitually.

I very much liked his categorization of savings levels in Automatic Millionaire. My chief complaint is the middle class focus during a time it is shrinking but the poor probably aren't listening and the rich don't need his advice.

One tries to have the best life possible and the choices we make and time horizon we use are unique to each of us. I am probably in the get rich quick (as quickly as possible anyway, not through schemes or scams) and let your money work for you school. Bach is in the work a lifetime and retire school. Others are in the live for the moment come what may school. The question isn't which is right, but which is right for you. A lot of people will never see retirement so delaying gratification is nonsensical for them. Others may be retired longer than they worked and want to leave a legacy. Choices all, and we all have to make them based on limited information and operating constraints, but they are uniquely ours to make.

[Zook]

Good post Lord....Great POV. Much appreciated!

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