PHUKET: It really doesn’t matter if you make a little money or tonnes. If you can’t master this very important step you will never achieve financial freedom. It sounds all too simple in theory, yet in practice so many people have trouble staying disciplined.
The step I am referring to is committing to setting aside a minimum of 10 per cent of all income you make and putting it into long term savings.
The following discussion is not about what you do with this money, but simply getting you to understand how crucial it is to your future and those of your loved ones. Most people have no idea how big the trade-off is when they squander money in ‘today’s currency’, or what an economist would call the opportunity cost of consuming non-essentials in lieu of investing. Because of the effects of compounding, an apple eaten today has cost you the equivalent of many apples in the future. This effect gets exponential, and over longer time frames the apples eaten today becomes holidays and luxury cars foregone in the future.
Let’s use coffee as an example since I don’t want you to go and skip that apple. It’s best to keep the doctor away, although that’s a discussion for another day. Let’s assume you have a 100 baht coffee at a fancy coffee shop on the way into work every day so you don’t have to wake up half an hour early to make your own at home.
If you buy a bag from the shop it might cost you 10 baht per cup, saving you 90 baht per working day. Let’s call this US$3. Multiply this by 20 working days and we can say it is US$60 per month or rounded off to US$700 per year. Now let’s assume a 5 per cent average annual return per year, which could be guaranteed if you were paying down debts like a mortgage or student loan at this rate.
If you skipped your fancy coffee and used the savings to pay down your mortgage over its 30-year term, we are talking about US$50,000 gained from a very small effort every day. Keep in mind less than half of this was the actual dollar amount of what you forewent in short term consumption; the rest is the magical effect of compounding.
Now you don’t need to skip luxuries like fancy coffee if you can be disciplined to save 10 per cent or more of your income every month, but the example just goes to show how very small changes in our daily habits can add up to significant chunks of cash. If you can save even more, what you get back in the future is even greater, or you can achieve financial freedom and stop working even sooner.
Now we shouldn’t live like paupers either, since we could be hit by a tuk-tuk and die tomorrow, so we need to find a balance that works for us in this trade-off. Most people err on the side of over-consuming now, so a systematic percentage followed with strict discipline is the best approach. This way, if your income goes up or down you just keep it in the same percentage and adjust your lifestyle accordingly.
Sadly, most people adjust their lifestyle to increase to 100 per cent of any additional income earned, despite the fact that we quickly adjust to new lifestyle levels and our overall happiness reverts to where it previously was.
We usually even increase our stress as the thought of going back to a previous lifestyle that we once were happy with creates a fear that didn’t exist when we were there in the first place. It’s much better to increase our means greatly first and then slowly increase our lifestyle. By committing to saving a fixed percentage of your income, you will do this automatically as long as you can stay disciplined. Do your future self a favor. Trust me, you will thank yourself.
David Mayes, MBA, lives in Phuket and provides health, wealth, and life coaching to expatriates around the globe. He has been involved in financial markets for 15 years and specializes in tax efficiency and UK pension transfers. He can be reached at email@example.com
— David Mayes