An article recently went up on Dr Wealth, arguing that switching out your daily cup of Starbucks for a normal cup of kopi as a way of saving money is missing the point. Small savings like this is not a great way to grow your wealth.
This article attracted quite a bit of brickbats on the BIGS World Facebook group, mainly slamming the article for using the example of Starbucks to illustrate the impotence of saving money on small things.
To be fair to the author, he makes a lot of valid points. To save money and grow your wealth effectively, you should focus on the bigger picture. Having a system for saving and investing would be more important. Agonizing over decisions on small purchases doesn't really work because it is very hard to restrain your spending on small things day in day out. You will probably lapse and then spend time feeling guilty over it. More importantly, the Starbucks story is an example and readers should substitute Starbucks coffee for any activity that applies to them, such as taking Grab rides.
However I think the article is missing the point in a few ways.
Savings is a vital pillar of achieving Financial Independence, Retired Early (FIRE)
The idea behind financial independence and retiring early is simple. Save enough for retirement and invest your savings.
Savings = Income - Expense
To do that you need to increase your income and reduce your expenses. Why do you limit your focus to just the Income part of the equation and neglect the Expenses part?
To do that you need to increase your income and reduce your expenses. Why do you limit your focus to just the Income part of the equation and neglect the Expenses part?
Underestimating the difficulty of increasing your income
The article reads like it was written from the viewpoint of a person with certain advantages. Someone who has the opportunities, spare time and energy and skill-sets to increase their income. In reality, it is not easy to grow your income because you have less control over your income than you think.
-if you are a salaried worker, you need your company to be doing well, your boss to like you in order to get a pay raise.
-if you seek to grow a side hustle, you need time and energy to invest in your side hustle. This is difficult if you have a family to look after, is a care-giver, a job that takes up much of your waking hours
-you need to have skills that are marketable, and if not, you have to invest time and money to learn the skills. For example, you can't be an Uber driver if you don't have a Class 3 license.
So for those us poor mortals without any of the above advantages, what can you do? Go back to basics; save more by cutting back your expenses.
Savings if compounded over time can have massive effects
The example he uses in his article goes like this:
Imagine you save the 2,190 bucks in 2007 and on 10 Jan 2008, invest it into the STI ETF. On 2nd Jan 2009, you invest the dividends received in 2008 and the money saved in 2008 (2,190 bucks) into the STI ETF.
Do this over and over again annually.
As of 28 September 2018, you would have 30,135.60 worth of STI ETF units, and received 1,050 bucks of dividend in 2018, which gets you about 150 cups of Starbucks. Granted, its not 1 cup a day but who really wants to drink a cup every day...
In conclusion, while the writer makes great points about not overly focusing on savings and neglecting growing your income, he seems to have made the same mistake of focusing only on growing income and neglecting savings.
-if you are a salaried worker, you need your company to be doing well, your boss to like you in order to get a pay raise.
-if you seek to grow a side hustle, you need time and energy to invest in your side hustle. This is difficult if you have a family to look after, is a care-giver, a job that takes up much of your waking hours
-you need to have skills that are marketable, and if not, you have to invest time and money to learn the skills. For example, you can't be an Uber driver if you don't have a Class 3 license.
So for those us poor mortals without any of the above advantages, what can you do? Go back to basics; save more by cutting back your expenses.
Savings if compounded over time can have massive effects
The example he uses in his article goes like this:
Cost of Daily Starbucks for 1 Year: $7 X 365 = $2555
Cost of Daily Kopi for 1 Year: $1X 365 = $365
Cost of Daily Kopi for 1 Year: $1X 365 = $365
Your Savings in 1 Year: $2190
If you invest your savings from cutting back on your daily Starbucks in the SPDR Straits Times Index fund, you’ll have made a 4% annualized returns on the average for the last 10 years.
You’ll have made an extra: $87.6 per year.
(Data as of 6th September 2018)
I’m pretty sure you’ll forgo the $87.6 a year to get your much needed caffeine boost in the morning.
Actually, if you compound this over a period of time, you get a different figure.Imagine you save the 2,190 bucks in 2007 and on 10 Jan 2008, invest it into the STI ETF. On 2nd Jan 2009, you invest the dividends received in 2008 and the money saved in 2008 (2,190 bucks) into the STI ETF.
Do this over and over again annually.
As of 28 September 2018, you would have 30,135.60 worth of STI ETF units, and received 1,050 bucks of dividend in 2018, which gets you about 150 cups of Starbucks. Granted, its not 1 cup a day but who really wants to drink a cup every day...
In conclusion, while the writer makes great points about not overly focusing on savings and neglecting growing your income, he seems to have made the same mistake of focusing only on growing income and neglecting savings.
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