Principle #3: A Little Goes A Long, Long Way
Do you think you can't save another centavo anymore? We often feel we've done everything to cut costs. That's why we always think: If only I earn more, I can save money.
Of course, we want to earn more. But don't you notice the more you earn, the more you spend? But even at our current income, we can find ways to save money.
Remember the previous exercises on coming up with your Personal Cash Flow Statement and Spending Plan? Certainly you've seen where your money goes. But look deeper.
If you track your expenses on a daily basis for a week or so, go through each expense item. Perhaps you ignore the "little" things. You know, coffee, cigarettes, dessert, movies, parking. Maybe you've lumped these under a single category such as "Daily Expenses". After all, you don't want to account for every peso that comes out of your pocket.
But the little things count a lot. A penny saved is a penny earned. And as you will learn, it will earn a lot, lot more.
David Bach, author of "The Automatic Millionaire", calls it "The Latte Factor".
If you drink latte from a fancy cafe every work day, calculate how much the "opportunity cost" is if you had invested the money in an investment such as a mutual fund.
How much does a cup of latte cost here? Say 70 pesos. That's P350 a week or P1,400 a month. You can invest as little as P1,000 in a bond fund (after the initial investment of P10,000). So if you put in P1,400 in a bond fund that returns an average of just 8% a year, and you do this diligently for 5 years (or a total investment of P84,000), you'll end up with P100,810.25 by the end of the 5th year. On year 10, it's P148,123.33. On year 15, it's P217,641.76. On year 20, it's P319,787.15.
That's almost P320,000 just for saving P1,400 a month! What if you set aside more each month? What if the fund or some other instrument averages 9% or 10%?
If you save P5,000 a month for 5 years, by the 20th year, you'll have more than a million pesos.
That's the power of compounding. When the gains from your investment (interest income, dividends, capital gains) revolve such that they too earn further gains, your money compounds. For example, for an investment that returns 10% on average per year, your P100,000 earns P10,000. That P10,000 then also earns 10%, or P1,000 in the second year, such that you now have P121,000 (i.e. P110,000 plus 10%.) And so on.
So the earlier you invest, the more you put aside, the further you hold on to the investment, and the more regular and often you save, the more powerful compounding works.
That puts your caffeine fix into perspective, right? I used to hang out at Starbucks or Figaro or some other cafe and drink brewed coffee, or a capuccino, with friends or by myself practically every afternoon. Imagine how much I could have earned if I set aside the cash for investments.
I still drink coffee, but I stopped thinking I should get my fix at Starbucks or Seattle's Best. Like today, I had coffee at Mister Donut for a third of what it would cost me at Starbucks. And most days, I don't drink at all. Sometimes, it's all in the mind. Do I flog myself if I ocassionally find myself ordering a Frapuccino? No, since it has stopped becoming an expensive and unnecessary habit.
Again, this is not about coffee-bashing. I love coffee. If a daily latte won't make much of a dent in my savings, then who really cares? But right now, it does.
And there are a myriad of things you can save on. Go through your list of expenses. Paying too much for electricity? Cell phone bills? Eating out? Shoes? CDs? Movies? You can go on and on.
All I'm saying is you can cut down a little across all these items without totally giving up on them or depriving yourself on some small luxuries. Gee, I'm not giving up going to the spa with my wife. But I don't have to do it every month. I mean, whatever.
Just cut a little across a lot. Because, as you can see, a little goes a long, long way.
