Not only am I a nostalgic at heart, but I am also a great romantic. The autumn landscapes exalt me every year and I line up the hikes in the forest (too many clichés, I know). Aside from my love of the season, what also knocks me over every fall year is our collective infatuation with fall spices! If only a third of taxpayers contribute to an RRSP, it is suspected that 100% of the population (including your humble planner) has already purchased a hot drink inspired by pumpkin marketing. But what is the real cost of those $ 5, 6, or even 8 coffees?
Autumn is sometimes gray and these delicious potions warm our hearts. In my part of the country, the car service lines are sometimes so long in the morning that they push back onto the main arteries. Coincidence or not, they are always longer on Thursdays, payday for many. Every week I watch the scene with some desolation; knowing that the majority of households do not save enough for their retirement, how do they find the means to afford, day after day, a luxury that keeps them away from financial freedom? Knowing that many people work an hourly rate of $ 15, how can they make this choice, and sometimes Monday through Friday? It seems essential to me to understand the real cost of not making your own breakfast or coffee in the morning.
Calculate the opportunity cost
Each budget choice has an opportunity cost of saving that you can achieve with the same amount by making a different choice. Thus, the famous coffee pumpkin spice latte doesn’t really cost $ 5-8 a day. It corresponds to a potentially saved amount of $ 1,500 to $ 3,000 per year! It’s not that much, you say to yourself? Yet if you save $ 40 a week and invest that amount in the stock market at 5% annual return, those little coffees you bought without thinking about it will be worth almost $ 27,000 10 years later if invested in an RRSP. , and a little over $ 24,000 if placed in non-registered investments …
Obviously, the younger you are when you read these lines, the more you are able to take advantage of this habit of calculating the lost savings opportunity when you get ready to spend. The magic of compound interest being what it is, those same coffees you saved during a decade of your youth equate to an RRSP investment balance of almost $ 91,000 after 35 years. We can imagine the economy from here if the daily expenditure includes the full lunch! Also, the opportunity cost savings calculation applies to all of your expenses. I invite you to keep it in mind when making the next big financial decisions in your life.
Think in “pre-tax dollars”
Here is a method that works very well for me when choosing a budget expense: I add the taxes I had to pay to afford the expense. I understand that it is actually costing me more and more. Do you know your effective tax rate? This is entered on the summary of your income tax return. So if it’s 40%, remember you must have earned $ 8.40 to buy yourself your $ 6 coffee. But if you buy it every day, Monday through Friday, that annual expense item jumps to $ 1,560. So you had to work for $ 2,185 to afford the luxury of not making your coffee in the morning. Based on your hourly rate, you can now decide if it is good enough to sacrifice all that effort and the taxes that come with it. The image is more powerful when applied to all of our choices or even major expenses. For example, monthly car rental or purchase expense payments of $ 10,000 per year actually cost $ 14,000 in gross income, according to this same calculation. This easily represents almost a quarter of the gross annual income of many people!
Manage your household as if it were a business
My clients most advanced in their financial goals are those who use the annual budget to know where their money is going and adjust their choices accordingly. They understood the importance of a cash budget, because expenses and income are not linear. Cash management is your best bet. But above all, they do a regular “bookkeeping”, even monthly, in order to follow the evolution of their real expenses and income compared to the budget adopted at the beginning of the year in order to adjust.
Moreover, I am often asked if the amount indicated for different items is “correct”. Remember, there is no right answer to how much you should spend on groceries, clothing, travel. You have to make the necessary choices to prioritize the most important according to your own values, goals and objectives. However, my advice is definitely to view savings as a fixed expense, in order to adjust discretionary spending with what is left over after deducting disposable income.
In closing, I challenge you this weekend: will you be able to make your fall outings and admire the colors while resisting the call of the scent of fall spices?