A recent article on CNBC has been doing the rounds - Here's how giving up coffee can make you rich. The article starts off with a provoking statement: Getting rich could be more possible than you think. It then goes on to quote self-made millionaire David Bach: "Regardless of the size of your paycheck, you probably already make enough money to become rich."
In his book The Automatic Millionaire, Bach ran the numbers to demonstrate just how much the little purchases matter.
(He is not alone. Much ink has been spilled elaborating how much we can save by eliminating that daily coffee. Kevin O’Leary in The Cold Hard Truth On Men, Women and Money advises readers to calculate and save the money paid for coffee, cigarettes, magazines and lunches. He calls this Ghost Money, which he defines as “dead money, money wasted on stupid things, money that should have been invested instead.”)
Michael Batnick comments on this article in The Irrelevant Investor. He points to a few assumptions that go into that line of thinking.
- Assumption 1: People are robots.
- Assumption 2: They are able to buy into an investment that delivers a 10% CAGR.
- Assumption 3: If the above is not difficult, then their ability to hold needs to be assumed. Through thick and thin, and ups and downs in the market, they should not sell.
- Assumption 4: Instead of spending $5 a day on lattes they have nothing. Not true. He agrees that $5 a day on caffeine is a lot, but all coffee drinkers spend more than $0.
Sarah Newcomb, Behavioral Economist at Morningstar, has an interesting perspective.
I really don’t like the idea that people need to know the difference between a ‘want’ and a ‘need.’ We need to know the difference between a need and a strategy for meeting that need.
We always hear about how if we didn’t go to the coffee shop every day we could save, like, $1,600 a year. Everybody hears that and says, ‘Oh that’s awesome. That would pay for my whole health insurance premium.’ In practice, making that happen isn’t so easy, and such quick fixes don’t address a client’s real needs. Making coffee in the office might work for a day or two, but the reason you go to the coffee shop probably has nothing to do with caffeine. You’re probably meeting a different need than a need for caffeine.
People don’t go out to eat dinner because they need food. They do it because they want to connect with friends or experience something novel. They’re meeting needs for social connections, for convenience. If you cut something out of your expenses without tracing it back to the need that you’re meeting, the expense goes away but the need doesn’t—it stays there and gets louder and louder until you finally meet it.
Restructure financial priorities to meet your needs in a way your current finances can handle without also sacrificing future security.
Financial planning goes beyond spreadsheets and charts. So much financial advice consists of numbers and ‘shoulds.’ But the reality is that we make all of our financial decisions in the larger context of our emotions, our desires, our sense of identity, and our desire to be accepted. Very little of it really has to do with numbers. It has to do with these stories that we’re telling ourselves and the stories that we want to believe about ourselves. Ask, ‘What are the needs that I’m meeting?’ and be brave about answering those questions in real life. We do a lot of things with our money because we want other people to like us. We’ve got to admit that and then say, ‘Okay. Now how much am I willing to spend for others to think I’m awesome, and how much is just not worth it?’
