We are constantly told that you must save for the future and while hearing
this advice gets old fast there's no doubting that it's true however when you
try and take action on this advice it can often seem futile in nature this is
because most people use the wrong strategy when trying to save money and
this misguided approach keeps them in financial straits for the majority of
their lives luckily boss in this video i will share with you the real reason you
can't save any money and if you're new to the channel then hit the subscribe
button below for more life-changing content when most people start their
savings journey they take it slow and begin to cut out small expenses one of
the expenses that takes a lot of flock is your daily starbucks coffee and in my
opinion this is an expense you can definitely do without
so for those who see saving as a bigger priority than getting an expensive
caffeine fix these types of expenses are the first to go however for many hopeful
savers these menial expenses are the only ones to get cut as they try and
adopt the latte factor approach to saving and investing but why is that
author of popular personal finance books like the automatic millionaire and the
latte factor david box suggests that simply cutting a routine expense like
your starbucks latte is enough to dramatically change your financial
future he argues that using coffee to invest when earning a 10 return will
grow to 950 000 in 40 years
now obviously this advice doesn't just pertain to lattes you could cut out the
cost of buying your lunch one day a week or eliminate your weekly cigarette habit
at the core bach is not wrong by advising people to lower their costs
however when taking this exact advice at face value and not diving into the
intricacies of this plan it can set many savers up for failure in fact there are
three primary reasons why only cutting small expenses will not grant you the
riches you are led to believe you would eventually have the first is the cost of
the item you were eliminating this investing method and promised one
million dollar future value depends on you saving and investing five dollars a
day however unless you are ordering a deluxe drink from your favorite cafe
then chances are you are not going to be saving a whole five dollars but two
dollars and fifty cents or maybe three dollars instead and based on some simple
logic if you aren't saving and investing the amount of money that this
calculation requires you to then there is no way you will have that a million
dollars you've been promised 40 years from now the second factor when trying
to save an appreciable amount of money via minor expense cutting is what you
invest that money into under the 1 million dollars and 40 years premise the
expectation is that you are putting all that extra money into stocks however as
you already know a well-thought-out portfolio will include a mix of
different assets as holding only stocks is rather risky by nature according to
the rule of 110 used by most experts today the percentage of your assets you
have in stocks should be roughly equal to 110 minus your age adjusted up or
down based on your risk tolerance even a 22 year old wouldn't start out with 100
in stocks and no one would remain 100 invested in the stock market over the
course of 40 years and if you aren't investing as aggressively as is
recommended in this plan then you will not achieve the returns you desire which
again reduces how much you can save over time the final element are inevitable
financial factors of inflation and taxes over the time span of 40 years your
investments could erode due to inflation by up to 67
so even if you could achieve the returns you would need to accumulate a million
dollars by cutting small costs that a million dollars would not have anywhere
near the buying power it has today not to mention if you are investing
through your 401k when you pull out the money you will be taxed which again
detracts from the money you can take out and enjoy if you correct all these
errors the total return on your latte elimination strategy looks a lot less
impressive let's start out by assuming that your daily latte costs three
dollars and not five you divert this money into a balanced portfolio of
stocks and bonds which has an average annual return of around seven percent
take out fifteen percent for taxes and after 40 years of diligence saving
you'll have about eighty thousand dollars adjust for inflation at three
percent and the actual buying power of your investment shrinks to around twenty
four thousand five hundred dollars that's nowhere near the 950 000 we
initially talked about and not much to show for 40 years of caffeine
deprivation another fundamental flaw with taking this approach of reducing
your frivolous spending in order to build your wealth is assuming you are
making these purchases in the first place you see many people simply cannot
spend three or five dollars on lattes every day meaning that this is not an
area they can use to increase their savings
sadly many americans can barely cover their core expenses and these expenses
should be a starting point when trying to save an appreciable amount of money
you see if you want to save a considerable amount of money you need to
leverage the 80 20 principle this means considering what 20 percent of your
expenses make up 80 of your costs and using these costly items to try and
build up your savings efforts let's look at three large cost categories and how
you can find ways to reduce the financial impacts so you can save more
money number one housing making up 37 of the
average americans monthly costs this expense category offers the biggest
opportunity for increasing your savings however unlike more trivial expense
categories like entertainment and clothing housing isn't a cost you can
eliminate completely it's for this reason that you need to be smart about
your housing decisions if you currently don't own a home and are looking to
purchase one then my first suggestion is to take on a property you can easily
afford the income rule is a great rule of thumb to follow and it states that
you should not buy a property that is any more than three times your annual
income but just to be sure you can afford it i would suggest you do some
quick math on what your living costs would look like if you were to buy that
property if you were renting the obvious thing to do is look for a cheaper place
even when renting all too often people get sucked into taking on a lease they
can't afford because they want to have a fully upgraded apartment or have one
located in the best area of town while it's nice to have a high-end living
quarters this benefit needs to be balanced with how it will support you
reaching your financial goals number two
transportation we all need to get from point a to point b however not everyone
does this in the most economical way possible it's for this reason that
transportation typically makes up 18 of a monthly budget luckily there are
numerous ways to cut down on these unavoidable costs if you're looking to
buy a car then what i recommend is to follow the 2410 rule when deciding on
which car to buy this rule states that you should put down at least 20 percent
also you should finance the car for no more than four years and most
importantly spend no more than 10 percent of your monthly gross income on
transportation costs another way to keep your transportation costs low is to pay
cash and for many people this means buying used this strategy is great for a
few reasons first paying cash allows you to avoid paying interest on the purchase
which is quite literally wasted money second paying cash means no car payments
so each month your beloved car stays on the road it is essentially writing you a
500 check which is the average price of a new car payment these days however the
best way to reduce your monthly transportation costs is to not drive at
all taking public transit walking or working from home can all save you a lot
of money and in many cases can help you get in some great exercise at the same
time therefore there are numerous ways to reduce your transportation costs if
you are willing to give up a little bit of convenience
number three college besides the ongoing expenses of housing and transportation
one that can act as a massive roadblock in your savings journey is college
tuition typically going to college will cost tens of thousands of dollars but
gaining an education doesn't have to be this pricey if you do things right some
options to reduce these expenses include taking advanced courses in high school
to reduce the number of credits you need to complete at college attending a low
price community college instead of an out-of-state school and taking advantage
of all available grants and scholarships also don't overlook the fact that not
everyone needs to go to college but if you decide to attend make sure it's for
a program that you will not only love but will offer you promising job
prospects upon graduation now that you know where to look to start saving more
money you should be well on your way however there are some people that want
to save faster and for those people i want to offer one final piece of advice
you can only reduce your cost by so much but when it comes to your earnings the
sky is the limit in short if you want to start saving real money you need to
increase your income having an adequate income can come in a few forms one way
is by taking the right educational path and getting a job that offers a very
competitive salary we all know that professions like medicine law and
engineering offer above average wages and luckily even if these options don't
appeal to you there are plenty of others that might however if you're already in
your career and have realized it's not a field that will play incredibly well you
can always see if you can move the needle by discussing the potential for a
razer promotion with your boss however in order to pull this off you need to
keep a few factors in mind first you need to ask at the right time asking for
more money when the company is experiencing tough economic times
clearly isn't going to work next you need to do your homework on what
comparable positions are paying your city if you ask for an unreasonable
raise your chances of success will be slim to none then you must have a list
of all the good work you've done maybe you've increased sales in the past year
or have developed ways to improve the processes at your company these
accomplishments will act as the support you need to convince your seniors to
open up their wallets finally you need to have your negotiation skills finely
tuned even with all this preparation done
there is a chance your boss doesn't go for your proposal so you need to be able
to adjust on the fly and drive home why you deserve a bigger paycheck it's only
once you start earning more money that you can use that extra income to
supplement your savings which will have you in a much better financial position
than simply cutting out a coffee from time to time hey it looks like youtube
thinks this next video is the one that will change your financial life forever
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