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August 7, 2011, 5:00 am

Why Cutting Out Your Starbucks Won’t Make You Rich

by: The Financial Blogger    Category: Rat Race


Starbuck CoffeeI am sure you have read or heard about the latte factor. The idea that if you cancel your morning Starbuck’s latte, you can save thousands of dollars. At first, the idea is pretty seductive. In fact, it is as seductive as a tall woman with high heels and a red summer dress. However, I can tell you something: both cutting out your Starbucks or talking to the nice looking woman won’t make it happen!

 

What’s the latte factor and how does it work?

Coming from the doctrine of the church of Frugality, cutting down on your morning coffee comes from the principle of saving on the little things over your lifespan. Technically, if you save $5 per day (the price of your latte) and you invest it at 5%, in 30 years, all your Starbucks will be worth $83,225 (assuming you are investing on a monthly basis). Wow, this means that while you are taking a sip of your latte this morning, you are actually drinking away almost $100k!

 

$83,000… really?

Well, this is just quick math as you have to take into consideration that:

#1 Chances are you will keep on drinking coffee and just choose a cheaper option (such as bringing your coffee machine to work). So you won’t save the full $5 per day.

#2 Chances are that since you are being frustrated on a daily basis (assuming you really like to pickup your coffee, and this example can be applied on something else that you like to spend money on daily), you will spend a part of this money elsewhere by “rewarding” yourself for saving “so much”.

#3 The 83K doesn’t count inflation. At a 2.25%, this only equals 42K in today’s dollar. I don’t know about you, but I’m  not particularly impressed by this results especially since I would have to wait THIRTY YEARS to use it!

 

Why Being Frugal Won’t Make You Rich

Regardless if you drink coffee or not; the point is that cutting down on small expenses won’t make you rich. I think it only creates little frustrations on a daily basis. So I’m asking you: why would you frustrate yourself during the next 30 years?

 

Being frugal will leads to a ton of questions:

– do you spend money on vacation?

– have/will you buy a bigger house, a nicer car, a better computer, a home theatre?

– renovate your kitchen, bathroom?

– do you buy ticket for shows? Play sports? Buy token gifts for the people you love?

 

Basically, each time you are opening up your wallet, ask yourself the famous question:

Is it really worth it?

 

Chances are that it’s not. But chances are that you will regret it later on. A few years ago, I went on a foreign student exchange program. I had spent about $15,000 over 6 months in Europe and this was one of the best investments of my life as I had seen things that I will probably never have the chance to see again in my life… until I turn 60 and retire! The $15K could have been saved, invested or used a down payment for a house. Instead, I went into debt and traveled the world. Ten years later I can tell you that it was one of the best financial decisions I ever made!

 

In fact, 30 years from now, you won’t regret your nice vacation by the beach, your nice house or your morning latte if you have them. But you will surely regret a mediocre life over 30 years just to be able to pay for your morning latte at the age of 60!

 

What will make you really rich

What makes people rich is passion; not frugality. The way I see it, your brain is the most valuable asset you have. You keep it busy with meaningless questions such as “what is better? A latte or small coffee to save $2 today” and you keep annoying the hell out of it with small frustrations and telling yourself “I can’t”, “I don’t have the money”, “I would rather save than spend”.  Do you really think your brain will reward you with the greatest ideas to make money? Nope. It will tell you to go to sleep early in order to not be too tired tomorrow and to keep your 9 to 5 day job.

 

However, if you drive your brain with great ideas and passion and use small rewards to keep yourself going; you will discover a whole new world of possibilities. Some people that follow my net worth update will say that I am running directly into a brick wall with the amount of debt I have. However, I can tell you that 5 years ago, my net worth was barely positive and today, I am looking at almost $200K. I can also tell you that 5 years from now, I will be closing in on $1M in net worth. How am I going to do that? By working hard and smart and by rewarding myself with my morning Starbucks!

 
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July 27, 2011, 5:00 am

In One Year From Now, Will You Still Be A Rat?

by: The Financial Blogger    Category: Rat Race


escaping the rat raceI have a shocking confession to make today: I’m a rat. But don’t start laughing too fast… chances are that you are a rat too! Which Rat am I talking about? The one stuck in the rat race of course! Today’s article is a prelude to my eBook that will be launched at the end of August, beginning of September:

 

The Rat Race: In One Year From Now, Will You Still Be A Rat?

This will be the first of a series of 4 eBooks on how to reach financial independence. If I was going to sell my house and downsize my lifestyle, I could technically exit the rat race at the age of 29. Since I want to enjoy the good life, I have made the decision to keep “racing” for a few more years. However, just the fact that I wake up and go to work by choice and not by obligation already makes my day! In this series, I want to share all my tricks and steps I have accomplished to get out of the rat race in so little time. So before I make the big launch, I wanted to start a series on this blog (which will not be copied / pasted into the eBook!) about the rat race and how it sucks to be stuck in it!

So who’s a rat and why?

We pretty much are all rats 😉 the thing is that if you have to wake up and go to work to pay your bills each morning, no matter how much you are making; you are a rat. You’re a rat since if anything happens to you this morning; your rat wheel will stop turning abruptly. This is why maybe up to 95% of the population is stuck in the rat race and don’t even realize in what kind of trouble they are in.

 

It’s like the Matrix

Why is it that bad to be a rat? Well this is the whole point: most people don’t realize they are stuck in a never ending race. It’s like being in the Matrix; you get used to living this life, everybody around you is living it and you don’t really see any other choice. When you take your 2 weeks vacation and go camping, you think it’s the good life and feel happy about it. If you make more money, you simply go down south for 2 weeks or to Europe and you live in a bigger house. But in the end, you are still stuck working every single day of the week. This is called the Rat Race Deluxe… but you are still in a stupid maze!

 

What else can I do? Everybody has to work! I just have to work harder, pay off my loans in the hopes a debt free life and enjoy a decent retirement. Well you know what? If you are thinking that way, you really are  deep in the Matrix!

 

The Shocking Truth: Throw Your Retirement Projects In the Bin

So tell me, how old are you? If you are reading this blog, there is a 70% that you are aged between 25 and 40. I’m lucky to have some “older” readers too but I know it’s not the majority of my readership. Chances are that you are working and living a decent life: a home, a car, maybe a family. Your plan is probably to work until you are 65 and retire… but are you making any serious plans to build your retirement nest egg?

 

Do you realize that if you want to retire at 65 and spend 47K per year (in today’s dollars of course), you need about $2,6M in retirement savings to say “bye bye boss” at 65? If you don’t have a pension plan, this means that you need to save $1,000 per month, starting from the age of 30, at an investment yield of 5.5%, considering an inflation rate of 2.25%. On top of this, I’m being generous regarding the 47K you could spend, I include a government pension (which is about 17k per year in today’s dollar). So technically, saving $1,000 per month during 35 years will only grant you a 30K income (always considering inflation)…

 

Why do you need such huge numbers?

There are 3 things that people underestimate when they think about their retirement:

a)      Inflation (see how 2.25% over 35 years can hurt your plan?)

b)      Life expectancy (if you are in the 30-40 range, chances are that you will live over 85)

c)       The capacity to save (are you really able to save $1,000 per month at the age of 30? Chances are that you can’t since you are just building your family, buy your first house/condo, etc.)

So the sad truth is pretty obvious: unless you work for the government with a defined benefit pension plan (which means that your employer guarantees your pension no matter what happens on the market), you are stuck in the rat race for real!

 

So what are you going to do about it?

Well, if you really like your Matrix and want to continue that way, you will have to choose among the following options:

a)      Work harder (extra hours & no lunch time, in the hope of making more money and get some promotions)

b)      Work longer (past the age of 65 since you won’t be able to stop working at that age)

c)       Cut your expenses (e.g. cut out what is great in life such as going on vacation, renovating your house, driving a nice car, doing sports, going to the theatre, paying for private college for your children, etc.)

d)      Die younger (well… I don’t advise it.  But technically, if you don’t take care of yourself over the years, chances are that you won’t reach the 70 year old mark… but I don’t think you will get fat on purpose 😉 ).

 

Personally, I chose to get out of the rat race and find other means to reach financial independence… This what I will be discussing in this series and even further in my books.

 

So… tell me, which option do you choose?

Do you have any plans for retirement? Are you doomed to work until you are 70? Or are you going to work 50-60 hours per week to cope?

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