Latte or financial dreams? There has been a lot of talk recently on the Web about how spending money on a latte ends up screwing up your finances and your retirement. Someone else, I can’t remember who, wrote that avocado toasts are really the culprit that sends many to the poor house, or at least without enough money to buy a home or realize their financial dreams.
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My first throught was, “Are you kidding me?” It takes more than a few latte(s) to do that. But I kept thinking about those articles and every time I had a latte, in my case americano, I wondered.
What made me wonder was not so much the $2. I splurge on a coffee once a week or so, but when I often saw the people in line ahead of me, spending $8 or more for a latte and an overpriced muffin. That’s $40 a week, $160 a month and $1,920 a year!
My frugal mind chose to think that A)they either only splurged once a month or B) they are the wealthy among us and this expense is really just a drop in the bucket for them.
I also remembered people from my days working in financial services and the reality that many spent their life in debt and never realized their dreams. To save and realize your financial dreams, you need a different mindset than when you spent without counting.
What do you need to do? Who should you listen to? Is your latte habit a slow leak that will sink your boat and derail your life’s dreams?
Ditch your Latte or Realize your Dreams
Don’t ditch your latte until you read further, but read fast, ideally before spend another $3.25+ on a latte.
The only important thing is to decide what you want your financial life to be in 3, 5, 20, 30 years and make a plan to get there. If latte fits into your plan, great.
A plan. A financial plan. This is the one thing I wish I knew about when I first started working, at 19. If I had, I would be a millionaire today, which is what I wish for you.
What should a financial plan look like? Quite simply it’s an inventory of what you have and a map: where you are financially and where you want to go, along with the steps needed to get you there. And while you are at it, calculate how much money you have earned since you started working and try to account for it.
That’s doing a net worth exercise: what you own minus what you owe= net worth. Ideally you own more than the amount you owe. For many that’s a sobering exercise: even just $50,000 for 10 years is half a milion dollars. Where has it gone?
Do you have debts? If so money needs to go to getting debt free, not on your latte habit. A $3,000 credit card debt at 15% will cost you over $3,000 in interest if you only make minimum payments of around $60 a month and it will take you sixteen years to pay off. Better put latte money on your payments. Otherwise that $3,000 bargain for furniture or a trip down south has now costed you $6,000+ – no bargain
Are your debts bad or good debts?
Bad debts are the kind that don’t make you money. The car debt, the clothes debt, furniture, wedding, lifestyle debt (restaurant, travel, holidays, spa, beauty products, etc.). That kind of debt is to be avoided and paid off asap. Credit cards should not be looked as “extra income”.
Good debts are debts on things that will appreciate in value: a house, education, starting a business, although even these good debts have no guarantee that they will be worth it in the end.
Housing prices usually appreciate in value, but the recent tanking of the real estate market in the US is proof that there are no guarantees. Housing prices have also gone down in some Canadian cities, Toronto being the last hit.
Education can potentially give you a better job with a higher salary but there again, there are no guarantees. And you can end up with a large student loan debt that you find hard to repay.
Finally starting a business is great but, success is not guaranteed there either as many businesses do not survive their 5th year.
In spite of the downside of these good debts, you have to decide for yourself if you would rather have a life of “Oh! Wells” instead of a life of “What Ifs?”
How is your Emergency fund doing? No emergency fund? Read this previous post of mine on that very subject.
Do you want to buy a house? How much downpayment do you have? If you can get 20% downpayment, you will save about $2,000 a year on a $300,000 mortgage , yes a year – so figure out that on a 25 year mortgage, that means $50,000. More motivation to cut the latte – and other expenses too. That saving comes from not having to get lender’s insurance. You can enter your numbers with this calculator
Buying a house also costs money upfront. You will need at least $10,000 for closing costs.
Starting the day you take possession, you also need to start a Home Repair & Maintenance saving account. It is recommended to save between 2 and 3% of the cost of the home for future house repairs, like the roof, foundations, exterior maintenance, painting, windows, doors, and other expenses related to owning a home. The kind we never think about when we rent. Are you more motivated to skip a few latte(s)?
If you buy a condo, it’s clear that there are condo fees. When you buy a freehold home, it can be a lot harder to stash that $200-$350 a month into a hands-off savings account. But do it. You definitely do not want to finance a new roof or foundation repair bill. Cost of new roof: $8,00 to $15,000 depending on size of home. Foundation can easily cost $50,000. I know from experience.
And yes, that 2% is $6,000 a year for home repair (assuming a $300,000 home), until you have $15,000 to $20,000 in that account and you can sleep soundly should the roof leak.
What about retirement? If you are one of the lucky ones who have an employer benefit defined pension plan, you are indeed lucky and you should still top up your savings and other registered retirement plan. For a few reasons.
When you retire, you will be so thankful to your younger self to be able to retire early, to take that cruise, to have a few hundred dollars extra each month, to not have to worry about money. Not sure? Do some calculation of how much government benefits and your pension will bring you. Then factor in “inflation”, that factor that makes today’s latte at $3.25 be $6.00 when you retire.
Take time to figure out how much you want to have to spend in retirement. If being home, tending to your garden and walking around the neighbourhood is what you want you will need less than if you plan to see the world. Crunch the numbers.
There is another reason you should top up your savings: you don’t know if you will have that benefit defined pension for life. You could lose your job, your employer could close shop, or opt out of that kind of pension. In the past few years many have done so. So take care of your future self.
A quick calculation: to withdraw $15,000 a year from your nest egg, for 20 years, you need about $300,000. If you hope for $30,000, then your retirement savings need to be around $600,000.
Of course if you hope to retire at 55 instead of 65, your nest egg will need to be a lot fatter.
Remember that you will receive some money from the government in the form of Social Security, Old Age Pension, and CPP. Maximum for those is around $15,000. Definitely not enough to live on.
I know frugal people who travel quite extensively considering their income. I know other people who have quite a generous income who live frugally, like use the clothesline, shop for specials, use electricity on low periods (smart meter) but spend the winter down south and summers at their cottage.
What all these people have in common (and I include myself in the lot – just wish I had joined earlier) is they make choices based on conscious priorities and their financial plan.
I can tell you that I don’t spend a lot on latte. For the price of less than 3 months’ worth of Latte, I got myself a nice spiffy Breville espresso-cappucino-latte maker, this exact one. Love it. One of my friends has a pricier Saeco which she swears by. And yes,like me, she sometimes goes to the neighbourhood café, but not every day. Not even every week.
Do you have other dreams? A sabbatical to travel or attend University full time? Disclosure: I went to University full time for 3 years using the equity in my house. While I don’t regret, it may not be for everybody.
If going to University full time is a dream, have a meeting with yourself, and your spouse if you have one. Look at all options. Do you qualify for a government grant, a low interest loan? Can you work part time? This ended up not being an option for me because my children were still young and I did not want to be away from home in the evenings. If you don’t have young children, it might be possible for you: full time university load is 15 hours, plus at least that much in study hours ends up to only 30 hours a week.
Putting a financial plan together takes a bit of time and a lot of determination. Reserve a couple of blocks of time – 2 hour minimum each, at a time when you have the most energy and can concentrate– quiet time with no interference of people, kids or electronics and start drawing your plan.
I truly hope this post helps you figure out what you really want and helps you see what steps you need to make those dreams a reality. And whether $70 a month on latte is where you want to spend your hard earned money.
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