Wednesday, June 13, 2012

Economics 101: Thinking in Terms of Retirement

If you're in your mid to late 20's or 30's, retirement might seem like some mythical time frame so far in the distant future, that you need not concern yourself with it at this time in your life.  I have often thought about the money I'm saving up for retirement and what I could be doing with that today, and sometimes I even get frustrated with myself.  Going out to dinner more, spending more on vacations, or just having more fun with your family and friends may seem like a good idea now, but you have to ask yourself one question; do you want to spend the rest of your life working a day (or night) job? 

Some people honestly enjoy their employment, but for the sake of definitions, I don't consider an employment you are passionate about to be a real job.  A job is something you do for the sole purpose of making money.  You may like your job, but deep down you just know that it is not your calling. 

There is an out, however!!!!....RETIREMENT...

Depending on how well you do with your yearly savings will most likely determine how close retirement is for you, but I will get more into that in a later post.  Right now, I'd like you to focus on a simple daily habit that many of you probably do everyday; the purchase of a designer coffee such as Starbucks.  According to a study performed in 2004, the average Starbucks customer spends approximately $4 on a drink per visit.  That may not seem like much per day, but lets do a little math around this and think in terms of retirement money.

Say for example, you buy one $4 drink per day (say 15 days per month).  This results in a latte budget of approximately $720/year.  Let's also say that instead of buying a latte, you used that money to invest in an index fund that had an average yearly return of 9% (which has been the S&P average).  Over the course of 30 years, your daily work habit will amount to approximately $98,930 of opportunity cost and direct coffee expense.  Now, I introduced another concept here with opportunity cost, but all you really need to know about this term for now is that it's the expense of not putting your money towards an investment.  An example of this would be if I just leave $100 in a checking account, then in one year, I would still have $100.  In reality it cost me $9, because I could have put that money towards and investment with a 9% return and have $109. 

The point I'm trying to make with the argument above, is that each expense you create has more value attached to it than the immediate ticket price.  If I do the same analysis above with just one $4 coffee, than each cup costs you $53 in retirement money (even more if you are 40 years or more away from retirement).  So, you need to start asking yourself an important question the next time you buy a cup of coffee: is this really worth $53?  Start thinking in terms of retirement costs, and you will start saving big money!

Wonderful Moment of the Day = Lying in my backyard and listening to the birds chirp while my cat chases a moth.

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