It seems trivial – the quick stop at the coffee drive-thru on your way to work or after you drop your kids off at school.
But in this investment article, business reporter Russ Wiles and Fran Kinniry, an investment principal at the Vanguard Group, illustrate how small, everyday savings can have a dramatic impact on your budget — or your retirement.
Here’s how it works:
Put the $3.50 a day (approximately) that you would normally spend on barista-made coffee in a cookie jar or some other safe hiding spot.
Don’t touch it.
At the end of the year, you’ll have approximately $1,200-$1,300 in that jar. (You’ll have more if you buy multiple cups of joe at Starbucks or Dutch Bros. or wherever.)
Invest this money for 30 years in a low-cost, balanced mutual fund. Assume you’ll get an average annual return of 6 percent.
Keep your coffee money in a Roth Individual Retirement Account. Why? Because Roth-IRA balances grow tax-deferred and withdrawals come out tax-free. (Bonus!)
Do the math: $1,260 each year (no, you can’t just do this for one year and expect a six-figure return) x 6 percent annually x 30 years = approximately $106,000.
Small changes = big returns
The lesson above is apparently a textbook breakdown of more complex, investing principals called “opportunity cost” and “compounding.”
But you don’t have to be a financial whiz to understand the bottom line: a small daily savings can yield big returns.
It’s definitely food for thought – and valuable advice to pass on to your kids.