In the last post we talked about how cutting down regular expenses and subscriptions can help you free up your cash flows. And, once you have done that, you can invest the money for the future and save some more for your nest egg.
Some people take this a little bit to the extreme. In the US, there is a personal finance commenter named Suze Orman. She is famous for saying that spending money on coffee is like peeing a million dollars down the drain.
How does that work you may ask?
Her math goes something like this: Assume you spend $100 a month on coffee. If you save that much money instead at an investment rate of 12 per cent per year, then in 40 years you will have a million dollars in hand. Therefore, cutting out your coffee will give you that much money over time.
There are many problems with this argument. The first being that a million dollars 40 years from now is worth a lot less if you adjust it for inflation to today’s terms.
The second is that the numbers don’t match with actual returns that have been seen by the US markets over time. The US returns are different from the Indian market – and 12 per cent is way higher than is a normal expectation for that market. What this means is that it will take a lot longer than 40 years to reach that million-dollar figure – and I don’t know about you, but that’s a long time to go without coffee.
And finally, I would like to point to a tweet by Barry Ritholtz, an RIA in the USA, who said that if a daily latte is the difference between achieving your financial success or suffering devastating failure, then you have much bigger problems at hand.
The point I am trying to make here is that whilst it is important to cut regular expenses to help free up cash flows, it is possible to take this to the extreme. Its ok to spend regularly on the things that improve your quality of life and help you to enjoy. If you believe that a morning brew is what helps you get ready and excited for the day, then go for it.
In terms of your budget, it is important to look at the big picture and try to cut down on things that have a significant impact on your cash flows or that you feel are not worth the value they provide to you. Remember that cutting spending is only one half of being able to increase your savings – and you can only cut so much. The other half is being able to increase your income and save more from it – and that has a lot of possibilities.