Every month, coffee drinkers spend a lot of money on coffee without realizing it. The amazing fact is that by simply eliminating your $3.50 latte and putting it in the bank, you could save over $700,000 in your savings account! How could that be? It's all about saving and earning interest over the years and letting compounding interest multiply your savings. Here are the three tips to help you do that:
Tip #1 - Put the money in the Bank
Save money on coffee each month, and you could be closer to being a millionaire. Imagine that instead of spending that $3.50 on coffee, each month you diligently deposited that money into your bank's highest interest savings account, term deposit, savings bond or certificate. Suppose that you find something that pays 5%. That's a little high right now but historically, 5% is a reasonable
number to use.
Tip #2 - Use Inflation
Next, we save money each month by using inflation. We can assume that the price of that coffee will go up by 5% every year. Next year that same cup of coffee will cost $3.68. So on the second year of this savings program, we use the idea of inflation to convince ourselves to deposit $3.68 every day instead of last year's deposit of $3.50 every day.
Tip #3 - Use the Magic of Compound Interest
And now we let the magic of compound interest take over. Each month as you save your coffee money, the total you save annually, grows to $1,277.50 (365 days x $3.50 = $1,277.50) and the bank pays you 5% on that money. The next year, you increase your deposit by 5% (365 days x $3.68 = $1,343.20) and the bank pays 5% on that year's deposit and the previous year's balance. If you do that same calculation every year, here's how much money you would save over the years:
- $20,809 over 10 years
- $67,692 over 20 years
- $165,638 over 30 years
- $359,743 over 40 years
- $732,480 over 50 years
You could save $732,480 over 50 years by just depositing your coffee money each month!
How to Save $1 million in just 30 years
But wait a second, 50 years is a long time to save money each month! Fortunately, you can save a million dollars in 30 years by finding $20/day to save each month and increasing that by 5% each year. You already have $3.50/day from your coffee money. All you need to do is find another $16.50/day. Here are the savings from just $20/day:
- $118,909 over 10 years
- $387,381 over 20 years
- $1,026,958 over 30 years
Isn't that amazing?