We are constantly told that you must save for the future and while hearing this advice gets old fast, there is no doubting that it’s true. However, when you try and take action on this advice, it can often seem futile in nature. This is because most people use the wrong strategy when trying to save money and this misguided approach keeps them in financial straits for the majority of their lives. Because of this, I want to share with you the real reason you can’t save any money so that you can reverse course if presently you’re on the wrong saving path!
When most people start their savings journey, they take it slow and begin to cut out small expenses. One of the expenses that takes a lot of flack is your daily Starbucks coffee and in my opinion this is an expense you can definitely do without. So, for those who see saving as a bigger priority than getting an expensive caffeine fix, these types of expenses are the first to go. However, for many hopeful savers, these menial expenses are the only ones to get cut as they try and adopt the latte factor approach to saving and investing. But, why is that?
Author of popular personal finance books like the Automatic Millionaire and the Latte Factor, David Bach, suggests that simply cutting a routine expense like your Starbucks latte is enough to dramatically change your financial future. He argues that using that coffee to invest, when earning a 10% return, will grow to $950,000 in 40 years. Now, obviously this advice doesn’t just pertain to lattes. You could cut out the cost of buying your lunch one day a week or eliminate your weekly cigarette habit. At the core, Bach is not wrong by advising people to lower their costs however when taking this exact advice at face value and not diving into the intricacies of this plan, it can set many savers up for failure.
In fact, there are three primary reasons why only cutting small expenses will not grant you the riches you were led to believe you would eventually have. The first is the cost of the item you are eliminating. This investing method and promised $1,000,000 future value depends on you saving and investing $5 a day. However, unless you are ordering a deluxe drink from your favorite café then chances are you are not going to be saving a whole $5 but $2.50 or $3 instead. And based on simple logic, if you aren’t…