In part one of this Live Below Your Means series, I wrote about semi-major purchases like buying a new couch. Today I would like to write about day to day spending.
Most people do not realize how much money they are spending every month. If you look at your monthly spending, I would be willing to bet that you are spending hundreds of dollars every month that can be saved or invested for the future.
Do you buy a Starbucks coffee every morning on the way to work? Do you eat at Subway for lunch everyday? Do you pay $80 a month for parking in the parking structure, when you could park farther and walk into work?
If you do, you are throwing away not just that hundred dollars every month, but thousands when you factor in the gains lost from not investing this money. Let’s just assume that you spend $200 a month that you could easily save yourself each month. You then take this $200 and invest it earning a 10% return. Some people could save and invest a lot more btw. Let’s look at some numbers:
$2400 in discretionary funds
Scenario #1 – Over a year period ($200/month x 12 months)
$2400 – Spent on coffee, fast food for lunch at work
10 Years Later:
$0 – All the money spend was on consumable goods
Scenario #2 – over a year period ($200/month x 12 months)
$400 – Coffee made at home, lunch brought from home. This money has all been spent on consumable goods
$2000 - Invested into stock market earning an average return of 10%
10 Years Later:
$5185 - $2000 Investment has now grown approx 250%
As you can see, by cutting down on your spending by $200 each month ($2400 per year), you not only save $2400 a year, but your money makes you and additional $2800 when that money is invested.
Now if you do this year in and year out, you will have thousands of investments out there to further invest and or retire on.
One of the best ways to control your spending is to make a monthly budget and stick to it. Once the costs are on paper, you cannot forget facts or twist spending to make them seem okay in your mind. You will also realize how much money you are throwing away everyday. It may seem like a small amount of money everyday, but it adds up quickly. Especially when you take into account the potential investment lost over the years.
In part 3 of 4 in this series, I will be writing about savings in a major purchase.
* Note that I rounded numbers in some instances to make it easier to follow.