Hello fellow investors and people who take care about their financial stability!
I bet you heard about the idea of saving on your morning coffee in order to invest in your long-term wealth.
But is it really so valuable?!
That’s what we are going to find out in this article. Please note that I did not perform any research in advance, so feel like we are doing a real-time study together.
The three Preconditions
- We live now in 1993
- No inflation adjustment — in order to keep it simple, we will ignore any inflation figures, i.e. the value of money remains constant during the whole study
- We drink only expensive coffee every morning — $3
About 30 years later…
It’s 2022 now. So, let’s see how much did we save. The math comes simple:
The number is impressive, as a whole. But considering we spent half of a lifetime to accumulate it, makes it less spectacular.
Don’t get me wrong, that’s a lot of money. I could get a new car out of that savings, but it comes also at the price of my favorite coffee…everyday for almost 30 years! I love coffee, thus, I’m not convinced so far. ☕
Now, the story continues!
As we are wise investors rather than money savers, we have put together the daily “coffee spending” and invest it in $SPY once in a month, i.e. $90 per month, plus re-invest the dividends, of course.
Here is how our “coffee portfolio” would have performed:
Say what?!
Our wealth would be worth about $141,600! And this is including the current market trash! (I mean crash. The peak portfolio value was at $185,000 in December 2021). Now, I can get an apartment
This changes everything. Note that we are talking about blindly throwing the money in an index fund (technically SPY is an ETF), that means no time spent for market research, no fees for investment managers, and so on.
What have we learned?
I would say two major principles:
Dollar-Cost averaging
That’s what happened when we consistently added $90 on a monthly basis, without taking care about market conditions.
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.
Compounding interest
This is when our returns are re-invested to generate additional gains in their turn.
I can simply illustrate the power of compounding by using an Compounding Interest Calculator:
Just note how your contribution increases little by little in contrast to the explosive portfolio capital gain!
No body cares about your morning coffee
You are free to spend on whatever makes you happy, the trick is that some portion of your income is preserved.
It is completely up to you to decide what spending to cut in order to start saving and investing. The most important thing is to start caring about your financial situation and realize that some small habits can lead to great achievements.
As investment into knowledge pays the best interest, I recommend you the following reading:
3 dividend stocks that pay out dividends Monthly!
