Lessons From Lunch
A few years ago we developed a problem in our office. We developed a habit of eating out at a Chinese restaurant weekly. We would each order egg drop soup, a bento box of Pon Pon Chicken, and an egg roll. This ritual became so ridiculous that we started to measure our business performance, not in terms of dollars, but how many bento boxes. It was then that I had an epiphany. What is the potential financial impact of changing this small practice?
To the Bank or to the Belly?
Let's say you go out to lunch every week and spend $11.54 each meal. If you did this every week, you would pay $600 a year for eating out. Following this practice over 30 years, you would have spent about $18,000 on eating out. $18,000! That's a lot of money spent on Pon Pon Chicken. While many people would love to have an extra $18,000 in their pocket, it's not likely going to get you through retirement unless you have some other significant things going for you. Or you plan on a meager costing lifestyle.
Inflation and Indigestion
Now let's complicate this monetary munchie example. It's time to throw inflation into the mix. Ok, you have been putting $11.54 into the bank or under your mattress for 30 years. What is the purchasing power of this money? Let's assume the inflation rate is 3%. At this inflation rate, the $18,000 we have saved would have the purchasing power of $7,416.59 compared to its purchasing power today. Ouch!
Contemplating Compound Interest
What could happen in this scenario if we had decided to invest the money? If you invested $11.54 weekly and averaged an annual rate of return of 8%, that money would have grown to about $73,000 over those 30 years. $73,000 is a much better scenario than $18,000, but how will inflation affect us? That $73,000 would have the purchasing power of $30,075.03 in 30 years with a 3% inflation rate. $30,075 in purchasing power will still not produce a robust retirement, but it's a much better scenario than $7,416 in purchasing power.
How much income could this hypothetical savings produce? Let's assume we want 95% confidence in having this money last for 30 years. Investing in a portfolio of 50% US equities, 30% US Bonds, and 20% cash, under these assumptions, this $73,000 portfolio could hypothetically produce $4,500 a year or $375/month in income without adjusting for inflation. With a 3% inflation rate, that would be equivalent to $1,854 in today's terms. That is $154.50/ month at the start of a 30-year retirement.*
The Bottom Line
By no means am I suggesting $11.50/ month will get you to retirement; this is far from the case. But hopefully, this example helps you see how small changes in your spending habits can affect your financial plans. There are many factors we left out, such as taxes, recessions, etc. Life is a little more complicated than assuming steady factors the way we have done. Real-life is different outside of a petri dish. I hope this helps motivate you to make those small changes to your habits. If you want a second opinion on your retirement plans, we would love to assist.
*For illustrative purposes only, not indicative of any specific investment product. Results will vary.