According to conventional wisdom, your daily latte is the reason your retirement savings aren‚Äôt on track. Apparently, if you cut the pricey caffeine, money will flow effortlessly into your retirement accounts.
Spending $5 per day may add up to a lot of money per year‚Äîbut your coffee-buying habits don‚Äôt determine your retirement prospects.
Here‚Äôs why you should enjoy your lattes without fearing for your financial future:
Math and Psychology Don‚Äôt Always Mix
It‚Äôs easy to see why lattes are cited as a financial problem. A daily $5 purchase adds up to $1,825 per year. Anti-latte advice starts with the assumption that you can keep track of the money you are no longer spending.
But it is next to impossible to keep small amounts of money around until they add up to something big. In theory, skipping your daily latte could potentially net you over $1,800 in a year‚Äîbut for most people, it would just mean you spend the 5-spot on something else, rather than save it.
That‚Äôs because of a cognitive bias known as the denomination effect, which means you‚Äôre more likely to spend a smaller bill and keep a larger one. $5 bills feel like they are worth very little, even though they add up over time.
Savvy Indulgence Works Better Than Austerity
Focusing on the cost of small indulgences can perpetuate the all-or-nothing view of money management. But you don‚Äôt have to adopt austerity measures to reach your financial goals. In fact, committing to a financial plan that forces you to cut every indulgence is likely to backfire.
That‚Äôs because any small slip-up in your austerity plan can trigger the ‚Äúwhat the hell‚Äù effect, where you feel like you might as well throw your entire savings plan out the window: ‚ÄúI bought a latte after promising myself no indulgences. What the hell! I may as well get that new tablet I‚Äôve been eyeing.‚Äù
Including small indulgences in your financial plan will make it easier for you to stay the course. Your daily cup of joe can help keep retirement savings from feeling like a miserable slog that you might as well rebel against.
Latte logic asks you to be proactive every step of the way:
- Cut out your coffee habit.
- Keep track of your $5 daily savings.
- Invest the money you save.
Skip any of these steps, and your retirement account is out of luck. That‚Äôs where automation comes in. An automatic transfer to your retirement or investment account every payday does not require any tough decisions.
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In addition, automation not only grows your nest egg, but also naturally prompts you to re-examine your spending habits. You‚Äôll have a little less money to spend each month, which means you decide on a case-by-case basis if you really want a coffee. That‚Äôs a lot more doable than an across-the-board ban of your favorite indulgences.
You don‚Äôt need to sacrifice small pleasures to prepare for your future. Making savvy decisions doesn‚Äôt have anything to do with lattes.