Latte-nomics 101
Your daily savings by giving up a Starbucks Latte ($4) and settling for a 'no frills' coffee ($1): $3
Imagine you are 30 years old and do this every working day for the next 35 years. There are 241 working days/year (52 wks*5 days/wk. - 9 holidays - 10 vacation or sick days). You'll save $723 per year. Investing this money in a broad portfolio of no-brainer index funds can yield an average annual return of 8%. Over a 35 year period with annual compounding, your daily Latte sacrifice would yield in the neighborhood of $125,000 when you turn 65. Great!
As impressive as this figure sounds, don't discount the sacrifice. Imagine going without an exceptionally brewed cup of coffee each morning for the rest of your working life (which can be the only comfort on some miserable days) , i.e. for 35 years or 8,435 working days!
Compare this with the case of a FinGho Walker who refuses to give up this daily indulgence but focuses on what's important.
FinGho-nomics 101
A FinGho Walker would not deny himself such simple indulgences but rather be strong-willed about resisting the Madison Avenue-driven symbols of lifestyle, typically seen in a major purchase we all are confronted with every few years....buying a car. Instead of buying a $35,000 luxury car just because he can (and to be told later by 'experts' to give up his daily latte to make ends meet!) , a FinGho Walker will buy a reliable used car like a Honda or Toyota, available for about $10,000. Both the 'showy' luxury car and the reliable used car will do a fine job of taking us to work every morning. I would argue the used car will make you a more relaxed driver knowing that the inevitable dents, accidents and repairs along your commute will cost a whole lot less to fix compared to a luxury car. Aside from stress-related advantages, here's the math comparing a reliable used car buyer who loves her morning latte vs. a stressed out luxury car buyer who has grudgingly given up the morning latte.
For the sake of apples-to-apples comparison, I assume both put down $10,000 for their cars. By buying a reliable used car, the FinGho Walker will save about $37,620 over 5 years or simply stated, an annualized amount of $7,524 (See table at the end of the post for details). Let's assume our FinGho Walker friend invests these savings in the same no-brainer portfolio (8% annualized return) as our 'Latte-less' friend. When both of them are 65 years old (assuming the used car and new car are both replaced every 5 years), the FinGho Walker would have accumulated $1.3 million more, while enjoying great coffee each morning! This is more than 10 times the amount accumulated by our friend who has to drive past Starbucks each morning and be reminded of his Latte sacrifice.
What's more, even if our FinGho Walker friend did this for just the first 5 years till she is 35 and then proceeded to buy brand new luxury cars every 5 years till she retired at 65, she comes out way ahead. By investing the car savings during the first 5 years and nothing more ever after, she would have accumulated over $444,000 more by the time she turns 65! This is still more than three times what our friend would have accumulated by giving up a refreshing daily Latte. This example illustrates the power of compounding and the rewards of making sensible decisions where they matter most.
Now tell me, is giving up the Latte everyday really worthwhile compared to making sensible purchase decisions in the major discretionary areas of your life?
| Luxury Car Buyer | Reliable Used Car Buyer | Savings Over 5 Years | |
|---|---|---|---|
| Purchase Cost ($10K down for both) | $35,000 | $10,000 | $25,000 |
| Annual Interest (5 year loan; 5% rate) | $774 | $0 (cash purchase) | $3,870 |
| Annual Insurance | $2,500 | $1,000 | $7,500 |
| Annual Property Taxes (~1%) | $350 | $100 | $1,250 |
| TOTAL SAVINGS | $37,620 | ||
6 comments:
agreed. vindicated again. I have stared liking your style of writing and the contents.
Could you write about investing sometime?
cool_r2i
Thanks and sure.
This is flawed math.
You need to attach a dollar value for enjoyment, satisfaction and safety. Premium fuel is usually the only choice in a Luxury car versus a regular unleaded for a $10K car. You need to factor this in your calculation as well.
Expensive luxury cars are more safer than a $10,000 Kia.
Also, the category of the buyer (market segment) is different for both. A luxury car buyer will not look at a Kia and save $25K.
Actually, the math is correct. The fuel costs are incremental and I know some luxury car buyers do use regular fuel (to save money!). As a former fuel science engineer, I will say the best use of premium fuels is in older cars that are prone to engine "knock". Besides, including the fuel differences (assuming people follow them strictly) makes my point even stronger.
The dollar value for "enjoyment" and "category" are entirely conditioned by Madison Avenue marketing whizzes. According to your logic, the categories are pre-ordained and we are mindless automatons and should make purchases only in the categories we supposedly belong to? Who came up these "categories" and god forbid, what will happen if you cross categories?! Why does Warren Buffet still drive a $25,000 pick-up truck?
My anonymous friend, such thinking will never make you a FinGho Walker. Try to see through the motivations of those who create the "status symbols". They can never be compared with true enjoyment that comes from total financial freedom.
Absolutely. The Latte must go! As well as the pricey car!
I think you're being inconsistent on the Starbucks thing. It is ok to indulge in the Starbucks habit but not on a car because it costs 3 times on the car?
$125K is nothing to scoff at. Also consider this: I brew as good/if not better at home for about 50 cents. Now the gap between Starbucks & mine is pretty huge for no qualitative difference.
While I agree that expensive cars are a bonehead move, some people get a thrill in their rides for which they are willing to pay their price(for example I know guys who swear by the Audi/BMW eventhough they are otherwise rational and know that these cars are amongst the bottom-feeders in reliability. Basically they are paying $12 bucks per day for the high-end car versus lets say $1 for the low-end reliable car.
I think your point is: don't give up the small indulgences to get the big one. I'm saying: don't give up the small indulgences, but you really should be aware of its price.
-Ananth
Ananth,
Thanks for your comments. While we are at it, we can also get rid of every indulgence (small and large) and live like an ascetic and die a multi-millionaire. If people are able to forego both small and large indulgences, they don't need my blog. Such people must be very wealthy already or don't care for any material possessions and live like a monk near the Himalayas. Clearly, most people don't belong to either extreme. In a world of almost infinite choice, one that offers a better long term return with least short term regrets is a superior choice. My purpose of this post to orient people towards such thinking.
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