How Small Changes Can Add Up to Big Savings
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How Small Changes Can Add Up to Big Savings
Building wealth is a daunting task for many because they see it as looking up a tall mountain and thinking it’s too high to climb. But the truth is, even putting aside small amounts can add up to something big. Small, periodic expenses on discretionary items like coffee, candy, and fast food (and the sales taxes on them) can add up to a lot. If those expenses were saved and put into an account that earns interest, dividends, or capital gains, the results over time could be substantial.
Learn more about the risks of investing.
Things To Know
- Small, periodic expenses on discretionary items can add up to a lot.
- A good way to find out where you can make changes is to track your expenses for a month.
What it means
This need not mean that you must deprive yourself of the little things in life. Rather, it is just an example; it means to look closely at your spending by tracking it for a while, see where you are leaking money needlessly, and make changes to your spending. Many an investor has built wealth by doing just that—all without suffering much deprivation in the process. It’s about full awareness of where your money is going. The next step is diverting these small amounts into savings or investments where they can grow in value or earn interest, capital gains, or dividends. With compounding, the earnings can add up even faster. In fact, for many people the lost earnings are the biggest casualty of not saving and investing more.
Think of it as a starting point
Saving small amounts here and there is not what investing is about. Rather, saving small amounts here and there is one starting point for gaining the discipline to control your spending. A good way to find out where you can make changes is to track your expenses for a month. Record every single penny spent. Check any online bank accounts to see if withdrawals are being made that you are unaware of. Most people are surprised to find expenses they can cut out—without depriving themselves of the little things in life. The drive to save is much stronger when you first establish a goal that you want to work for—retirement, a house, a small business, a hobby item, etc.
How much can you save by making small changes to your spending?
So-called "latte factor calculators" that you can find online let you plug in the numbers. For example, spending $3 every other day over the course of 10 years could instead become over $7,200 if put into an account earning 6% interest (compounded annually). This figure includes over $1,700 worth of interest alone. Is what you are spending money on periodically worth losing all this potential interest?
Of course, interest rates change, prices change, spending habits change, and time periods change. You probably cannot predict with certainty the amount that you will save, but you can see that small changes do indeed add up. That’s the point.
And you can still splurge on your favorite things (more so once you have built up a good savings), but you may need to scale it back or cut out other expenses. Going cold turkey could backfire and prompt you to binge-spend at inopportune moments.