Okay, I know the title of this post is a bit strange, but if you read on you’ll get at what I’m trying to say. Most people view spend and saving as equal opposites. For example, saving $3.33 is the opposite of spending $3.33 on a cup of fancy coffee. This makes sense if you are thinking about your math class and what you were taught in school. Therefore most people assume it’s the truth with personal finances as well. Making this assumption, however, is not only incorrect, it can have a devastating effect on your net worth. Let me explain a little further:
The problem with the $3.33 saved and $3.33 spent on coffee not being equal arises because the amount you can earn in interest on your savings is much less than you are likely to pay in interest for borrowing the money. Let’s say that you are able to put aside $3.33 or $100 a month (for the sake of simplicity) in savings and you do this for 5 years. If you do the math straight, you’d come out with $6000 in savings. If you spend the same amount by purchasing a cup of fancy coffee each day and do the math straight, you end up with $6000 in debt. This is what makes debt so deceiving for most people.
In reality, when it comes to money, rarely does the money sit making nothing. If you are able to save $100 a month, you might place it in an online bank which earns you 4% interest a year. By placing a bit over $3 a day into your savings, you’ll end just over $ 6,600 after 5 years.
What if the opposite occurs? Let’s say you think you have to have that fancy cup of coffee each day even though you don’t have the money for it, so you charge it to your credit card each day over the same five year period. In this case you don’t end up $6,600 in debt like you might assume, but just over $ 9,600 in debt (assuming 18% interest on the credit card).
The results are surprising to most people. The person who forewent the fancy coffee has a nice little sum in the bank while the person who couldn’t is nearly $10,000 in debt – a difference of $15,000 in their net worth all from $3.33 on either side of the break even line. The difference of about an hour of work at minimum wage.
While the numbers I presented aren’t 100% accurate because I didn’t take into account a lot of little factors such as credit card minimum payments or taxes, they give an overall accurate view of what living below your means and above your means can do to your net worth, even if it’s just a few dollars a day.