Two expenses stealing your early retirement dreams (that are not coffee)
In many personal finance headlines you’ll read or hear about these days, you’ll find that people (generally speaking) are not saving nearly enough for retirement.
That means the prospect of realizing any form of early retirement is even a bigger challenge or non-existent.
Take a look at the table below, published by MoneySense some time ago that suggested what you might need in the bank for retirement – these numbers remain quite relevant today:
While this table seems daunting the fact is this represents years of compounding power included.
In fact, the formula for any comfortable retirement is rather easy to understand:
- Continually spend less than you make.
- Save and invest the difference.
I suppose you could add a third element to my short list above and include:
- Keep doing #1 and #2 for as long as you can to maximize that compounding power.
Latte factors and sweating other small stuff
Regardless if you’re a dedicated subscriber to My Own Advisor or not (and by the way, why aren’t you reading my free content?!), by now I’m sure you’ve heard of The Latte Factor®.
Financial guru David Back coined and trademarked the phrase The Latte Factor® years ago as a means to highlight how daily or periodic small purchases may be stealing your retirement dreams.
In principle, David has a nice thought. This factor brings real meaning to how small steps can help you realize any major changes over time. I mean, for anyone who deals with change in their lives, you know that starting small is often the key to making larger life changes over time.
The problem I have with any “Latte Factor” take is this approach largely ignores the major money traps and big behavioural decisions that often squash most retirement dreams. Sure, saving $5 on your coffee and muffin each day will definitely add up when invested wisely. But a preoccupation on the small stuff instead of focusing on your major financial decisions is really a waste of time.
Instead of blaming Starbucks for stealing your early retirement dreams I suggest you focus on these areas of your life and try and get these two life decisions right.
I don’t care if you rent or wish to buy a house or you wish to buy multiple properties. If you don’t get this decision right it could cost you your retirement.
According to Statistics Canada, accommodation consistently ranks #1 on our household expenditures list. Depending upon where you live in our grand country, that spending could amount into thousands of dollars per month.
Google PadMapper (no affiliation) a site that highlights Canadian rental trends.
You’ll find that even 1-bedroom units in Canada can vary widely in price:
A standing axiom tells us that we generally shouldn’t spend more than 30% of our gross (i.e., pre-tax) income on rent or housing.
Well, I see two initial problems with this:
- Housing costs are rising, often much faster than wage increases for many, and
- A 30% pre-tax spending guideline is useless because of course you pay tax on your employment income. I know I do.
With just these items in mind you really need to right-size your housing decision.
While it’s aspirational to have a low Gross Debt Service Ratio (GDSR) – % income required to pay “basic” expenses such mortgage payments, property taxes and heating costs – the point I am making is if you get the housing decision right in your life then you can spend your $5 on your favourite coffee per day (or anything else for that matter) guilt free.
Point blank: don’t let $5 decisions trump potentially hundred-thousand dollar decisions.
While my wife and I have been far from perfect on this over the years, moving a few times and increasing our very own mortgage borrowing costs, I suggest you get your housing decision in life right by determining the appropriate amount of house you need at the price you can reasonably afford.
If you need help with your affordability decision check out this free calculator from CMHC (Canada Mortgage and Housing Corporation) here.
I read the average car payment in the U.S. is now up to $550 per month for newer vehicles.
That just seems crazy…
On top of that, both Americans and Canadians are taking on such car loans for longer stretches. I’ve read about some 8-year loans people are taking!
According to Lending Tree (no affiliation):
- Auto debt makes up 9.5% of American consumer debt.
- The average loan term is 69 months for new cars, 35 months for used and 37 months for leased vehicles.
- Gen Xers are the most likely to have a car loan, and carry the highest auto loan balances with a median of $19,313.
A reminder: a car loan is borrowed money to buy a quickly depreciating asset.
According to most articles I’ve read over the years, newer vehicles generally lose about one-third of their value in the first year or two of ownership. On top of that, sadly, since the pace of any auto-loan repayments usually remains constant, you might find you’ll quickly surpass the value of your car and owe more money than what your vehicle is actually worth.
Point blank: continually buying newer cars is a great way to kill your retirement plan.
I’m all for making small changes to improve your financial life. I’m working on mine all the time.
Like I mentioned above, we’re also far from perfect since we have moved a few times in our married lives and we purchased a newer vehicle many years ago as well. But in doing so, we have lived very consistently below our means. Despite any major housing or transportation purchases in our lives we have saved and invested the difference. Going forward we don’t intend to move in our near future. Our next car will be another gently used one, likely paid for in cash.
My early retirement or financial independence advice to anyone reading this blog is unless you’re focused on analyzing your housing and transportation needs, I suggest you steer clear of any Latte Factor.
David Bach is absolutely correct in that small savings can add up over time. It’s a good message with good intentions. Yet saving $5 here and there on your coffee or other small indulgences that might add joy to your life is not going to help you one bit if you ignore the biggest expenses and debts you’ll probably ever have.
What are your thoughts? Do you agree? Share your experiences or thoughts in a comment. I read every one!