Talking about giving up your daily latte, and pocketing the money instead as a road to financial success has become a bit of a cliché in the literature of personal finance, to the point that it is easy to make fun of all the people parroting the same advice. Nevermind that the average American spend just shy of $100 per month on coffee, and cutting that one expense could grow to more than to $16,000 in 10 years if you invested the money in the market instead. Those thinking about the specifics when it comes to the “Latte Factor” are missing the point because the actual value comes from learning to collect small wins.
Slow and Steady Doesn’t Crash and Burn
There comes the point in every person’s financial awakening where one will throb with restlessness, fervently trying to uncover the easiest way to make a lot of money as quick as possible. Most of us have it in us that once we start working on something, we want to see immediate results. It is human nature, and this impatience is at the root of much good.
When it comes to your money, however, impatience of this kind is not a friend. When someone joins a Ponzi scheme after hearing all the potential upsides, or invest loads of money in a penny stock, it is because they let their impatience take the wheel. And when you let your impatience control your finances, you might just find yourself just ruined by currency speculation, or just having lost after putting it all on red, in hopes of getting a quick and big win.
No, when it comes to building wealth, slow and steady is the name of the game. It might not win you the race, but you will be minimising the chance that you crash and burn. Financial success is all about extracting the best possible returns with the least amount of risk, and it takes time and patience to identify the risk associated with financial moves, not to mention familiarising yourself with your personal tolerance for risk.
Small and Sustainable Improvements
It is a symptom of a performance-centric western culture that we tend to focus too much on the desired end-state, rather than the process that we underestimate the difficulty of making drastic changes. Many websites writing about personal finance do it from the aspect of building enough wealth to retire, which, while doable, is a massive undertaking. I am conscious about this here at Abovare, and instead of talking about reaching Financial Independence and Retire Early (which amounts to the highly memorable acronym FIRE) I try to focus on building wealth to increase your freedom to live life on your terms.
But wait! It seems unreasonable to exonerate myself when the topic of the very first article published here at Abovare was to start your financial awakening with defining your desired end state. While I still believe it is important to be clear about why you want to do something, and what success looks like, I am now here to tell you that it’s OK not to do it all at once. Building significant wealth, especially of the size that allows you freedom to choose how and where you want to live your life, takes time, and you don’t have to do it all at once.
In fact, I would argue that attempting to do it all at once is a surefire way to assure that your motivation will flare out before long. And once that happens, it won’t be long until you find yourself living the same way you did before starting your project of change. A better way of approaching such a massive task is to focus on small, achievable and sustainable changes. The type of changes you can pull off without having to make radical alterations to your lifestyle in the short term. The sort of changes like, say, skipping your daily latte, that are entirely doable and leave you with $16,000 invested a decade from now.
Many Small Pieces of a Big Pie
The beauty of minor changes is that, possibly after some initial discomfort, they barely register. The magic of this is that, after a period of settlement, you are free to identify the next change you want to make. Perhaps that is cutting your cable which cost you $80 per month, possibly leaving you with another $13,500 in your investment account after those ten years. And then, instead of watching TV, you start cooking your food at home, saving another $200 per month. That can result in an additional $35,000 invested after ten years. By making some small, but lasting changes to your life, you were able to rack up $65,000 in your investment account.
For some, that will be enough. Others again want to continue adapting their life, step by step, until they lead a lifestyle that aligns with their financial goals. The point here is not to discuss what is or should be enough, but rather, to illustrate that focusing on small wins can yield significant financial gains over time. And, just as important, to remind you that it is OK to take it one step at a time. Even if your savings rate is not at a point that will let you retire anytime soon, that is fine. The important thing is that you are moving in the right direction.