Hello everyone, today we're going to talk about coffee and how you can use it to save for retirement.
Well, not coffee by itself. But how much you spend on coffee can definitely determine how much you're going to have in retirement. See, the average person spends about $4 a day on a cup of coffee. That's over a hundred dollars a month. I know a lot of you are going to say, Stephen, it's a luxury, right? I deserve that cup of coffee, and it's just a hundred dollars, not a big deal. Well, I'm here to tell you that a hundred dollars a month can turn into $349,000 over a 40 year period. If you were to start at the age of 25 and save $100 a month, every year until you were 65 years old. Through compounding and time value of money. You could have almost $349,000.
Let's take a moment to talk about Compound Interest; I know it's not a term that we normally use in our day-to-day lives, but compounding interest is easy to understand. Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan. The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest.(www.Investopidia.com). It is just interest on interest. So we take our example here. We've got somebody who's 25 years old, they're putting in $1,200 a year, making 8% on average. At the end of the first year, our $1,200 has turned into $1,296. And then in year two, we're going to make another 8%. So that $1,296, it turns into $1,399 at the end of year two and so on and so forth until we get to the 40th year where we'll end up with $349,100. So as you can see through the power of compounding, we can take our $1,200 a year investment and turn it into $349,100 over a 40 year period. (SEE VIDEO FOR A WALKTHROUGH ON COMPOUNDING INTEREST)
Now I don't recommend you just give up your daily cup of Joe. I get it. I love coffee too. I use this example to illustrate that when it comes to retirement, it's important that we all start early on in life. That way you can take advantage of compounding interest. If you wait too long, it's hard to catch up.
So here's how you get started. Open a retirement account. Normally, if you're employed, your employer will have already set one up for you. These are usually 401k's and are a great way to get started. If you don't have a plan through work, you can set up an individual retirement account, which is something you set up on your own, with a financial advisor or an online brokerage account. I encourage you to set up a monthly investment plan that allows you to contribute a certain amount each month. That can be $50 or $550 a month. Any amount will help get you to your financial goals.
Over time, you will get used to that money coming out of your paycheck or checking account and going into that retirement savings vehicle. Once you get comfortable with it, you will want to contribute more. You'll eventually get to the point where you're contributing $500- $600 a month, and it's not going to be a problem for you. I highly encourage you to meet with a financial advisor, they can help you get started on your retirement savings journey.
If you have any financial questions, please feel free to reach out to me or complete the form below. Let me know. Are there any spending habits that you used to have that you've gotten rid of? Share your story, encourage others to get rid of those habits, and start saving for retirement!
Stephen C. Jones, AAMS, AIF, CFP®