We've all heard about saving on the latte every day, and that will eventually fund our retirement. But this story has been sensationalized by media and spouted all over every personal finance blog ever written. Some in favor, some argue it's ineffectiveness. Neither are helpful at dissecting the story into actionable insights. To help us understand the reasons behind this overused example, a quote from leadership expert John Maxwell comes to mind.
"The secret to success is to do a little bit every day. Doing a little bit every day is a lot more important than doing a lot some day." Most people live in some day." ~ John Maxwell
When looking at the coffee cup retirement example, the key is not that eliminating your morning coffee will make you rich when you retire. The numbers alone don’t support this assertion. Rather, the key is that if you make a seemingly small choice each and every day, over time that adds up to substantial wealth.
“You mentioned numbers, prove it.”
As you can see, even after 40 years, saving $ 5.00 / day into a retirement account averaging 6% return each year won’t allow you to reach your retirement goals. Saving $ 5.00 each day is simply not sufficient to fund a comfortable and lengthy retirement, although it’s better than nothing.
As I’ve mentioned before, the minimum amount that should be set aside each year is 10%. The coffee cup retirement only works mathematically if your gross annual earnings are $ 18,250. If you earn more than that, the amount you need to save also increases.
“So the coffee cup retirement doesn’t work?”
No, if you earn more than 18 thousand a year, the coffee cup retirement of saving $ 5 each day doesn’t work. But the principle of “small actions add up to big results over time” still stands. Using that as our take-away we can understand that cutting our morning mocha isn’t likely to lead us to financial freedom. But a small action, such as investing 10% of our annual salary each year, every year, will put us on a path to financial freedom.
Keep drinking that coffee, just as long as you save 10%. If you aren’t there yet, maybe $ 5 each day is a good place to start. Just remember, small positive choices every day will put you on a path to financial freedom.