You make choices about your financial future every day. Whether it’s saving 10 percent of your income or purchasing a water bottle at the gas station, these small, seemingly insignificant choices can decide your financial future over time. And if you don’t carefully plan for your money to go where you’d like it to go? It can cost you your happiness and security in the long run.
Even though we might not think purchases that only cost a few dollars are significant, they actually are quite important. Especially when you consider those purchases from the perspective of compounded interest.
The principle of compounded interest looks at the power of an amount of money over time. That is, the $100 you invest today can have an incredible impact on your finances because it accrues interest on that original amount each year. So investing $100 now versus investing $100 in five years? That later investment simply won’t work as hard for you.
This same principle applies to smaller expenses. You might not think you’re deciding between an ice cream dessert and a well-funded retirement, but if you’re not saving wisely, you just might be.
Five things to reconsider spending money on in favor of investing in your retirement
There are few more I can list, but to me these are the biggest ones. (See- 20 best practices for retirement saving)
Skip Dessert on Your Dime
Desserts in restaurants typically have a 15 to 30 percent mark up, but can even go as high as 70 percent. Depending on your investment strategy and returns, every $6 you spend on a dessert (and that’s a low estimate) could be half again or twice as many dollars in your retirement fund by the time you reach retirement.
That may not sound like much now, but if you take five or six desserts per year over the next ten years… that’s could easily account for a cruise vacation later in life! If you want something sweet, head to your local grocery store instead of splurging at a restaurant. You can get something just as delicious and look forward to an even sweeter retirement.
Classic Coffee Example
Coffee is a much-visited compounded interest example, but it’s an accurate one. Coffee can be the sneakiest of splurges because it’s something that so many people enjoy daily. Most of the time, people only spend a dollar or two on coffee, so they do not feel its financial impact. But it adds up—especially if this is a part of your everyday routine.
You need to monitor your spending on coffee and any other store-bought treats that might accompany your coffee habit. Aside from the direct cost of the item, it’s also an indicator of lifestyle inflation. Lifestyle inflation happens when you spiral into spending habits that are above your earnings.
If you’re buying “small treats” weekly or monthly, the odds are high that you’re making other “small purchases” that really add up as you spiral into greater and greater expenses. After a while, you might be surprised to look at your spending habits and see how much more frequent those splurges have become over time.
Cut Cable Costs
It used to be true that people felt like they needed cable to stay in the know about modern events. You couldn’t participate in those water cooler chats if you didn’t know what everyone else was talking about. But nowadays, with so many affordable streaming services, there’s no excuse to have cable TV anymore. (Also Read – Do you really need Netflix?)
For the $90 the average person pays per month, you can spend $8 or less for Netflix and still have plenty of entertainment options. With a service like Netflix, Amazon Prime, or Hulu, you can enjoy shows or movies when you want, and without commercials. When it comes to news, getting up to date information through the web gives you access to information more quickly than you would get through cable, and you have the ability to choose news sources that you enjoy.
Manage Your Music Expenses
Speaking of lifestyle inflation, there’s little reason to spend $10-15 on a CD or album anymore when you can use a pay-to-hear service. Instead of purchasing albums through traditional CD retailers on online through iTunes or Google Play, consider free online services such as Spotify.
Even though Spotify requires that listeners hear commercials ever few songs, if they are using a computer they can still select any album or song they wish to hear. Taking the ding of hearing commercials could save you dozens, hundreds, or thousands of dollars over the years, as the services like Spotify have essentially removed any reason to purchase music.
On my iPhone I have Pandora to listen to. I make full use of my 30 mins commute by listening to local radio station. In the evening I listen to songs on YouTube and Spotify. I don’t pay money to buy music.
Swap Out Bottled Water
In addition to having a negative effect on our environment, consuming water through little plastic bottles is rough on your finances. Instead of spending a dollar or two on a bottle of water, invest in a plastic or glass water bottle that you can use and reuse anywhere you go.
Bring the bottle with you wherever you go. Whenever you feel the need for a drink, you do not need to buy a bottle of water because you can find a water fountain where you can fill up.
It’s All About Choices
I wrote one post skipping latte won’t make you richer, but skipping latte can make you retirement living comfortable.
Now, you might decide that the dollar a day coffee habit is totally worth the price. There is nothing wrong with that, so long as you have weighed the pros and cons of this behavior, rationally decided that the ends justify the means, and you can live with the long-term financial consequences.
Such is true not just for coffee, but also for any of the items on this list. These are great things to consider doing in order to save money, but it is ultimately up to you to determine how you can best live you life with intention, making sure that you account for your future in your present.
The next time you feel an urge to grab some coffee or dessert, make your entertainment choices, or look for a way to quench your thirst, make sure that you are making financial choices that will help you when you reach retirement rather than keep you from doing the things that you would really like to do.
About the Author: Rich Ellinger is a serial software entrepreneur with a passion for investing. His latest company, Wealthminder, strives to help do-it-yourself investors create a workable financial plan and then marry that plan to a sensible investing strategy, all online. You can read more of his work at The Enlightened Investor.