### I'll have A $17,300 Latte, Please!

# Primary Points

**CENTS-**ability Tip 1: 10-Year opportunity cost is the real price.**CENTS-**ability Tip 2:*When*you spend your money matters–Money costs the most when you’re younger than when you’re older. $100 spent monthly in your 20’s is $138,400expensive than $100 spent in your 30’s if you have a 50 year time horizon.__more__**CENTS-**ability Tip 3:The*percentage*of your total net income that you spend is directly tied to the amount of money you’ll need to have in order to be financially independent**.**

C**ENTS-ability Tip 1:** 10-Year opportunity cost is the real “short-term” price.

In order to understand the power of our current purchases and what it represents, we need readjust our thinking from monthly expenses to* decade expenses*. If your spending plan allows for $5 latte’s during the business week, then that is $25 per week and $100 per month. It’s not just $100 a month, or even $1,200 per year, but the loss of revenue that that money would have provided if you had invested in a broad based low cost index fund like VTI (Vanguard Total Stock Market Index Fund). As Mr. Money Mustache says, each dollar is a little worker that makes you money 24/7. It is a reasonable expectation that over a 10 year period the stock market will produce on average 7% annual real return, or 10% average nominal return (returns that doesn’t account for inflation). So take any monthly expense and multiple it by 173 to get what it would have made at 7% if you would have invested it in a low cost index fund. So $100 x 173 = a real opportunity cost of $17,300 in the first 10 years. And, since that investment would double every ~10 years, that $17,300 would be worth $34,600 in 20 years (without adding additional funds!*) or $69,200 in 30 years. For an early FI individual who expects to live 40 or 50 years on their investments, the cost of that $100 per month “well deserved treat” becomes exponentially more pricey. For 40 years it becomes $138, 400, or for 50 years it’s $276,800. That’s $276,800 lost forever for every $100 spent when you have a 50 year time horizon.

C**ENTS-ability Tip 2: ***When* you spend your money matters–Money costs the most when you’re younger than when you’re older. $100 spent monthly in your 20’s is $138,400 more expensive than $100 spent in your 30’s if you have a 50 year time horizon.

The gravity of the situation is $100 in your 20’s is exponentially more expensive than $100 in your 30’s, 40’s, and 50’s. Why? Because of the amount of expected time the money has to grow exponentially. Just living life a little differently for 10 years can make a million dollar difference!

The actual cost will be dependent upon how long you expect to live in the FI Kingdom. If it’s 30 years then ~$69,200 is the actual cost of a 10 year period of $100 a month for latte’s. For 40 years it’s ~$138,400, and for 50 years your $100 a week habit is effectively costing you ~$1,107,200 in potential capital.

This is why the developing a spending plan is so important, because it requires you to track your spending and make predetermined choices about what you value. This can be evaluated and re-evaluated over and over again as you move through life. But the important aspect of it all is that spending is done with your eyes wide open and not eyes wide shut. Developing a spending plan also implicitly helps you develop a sense of your own values and forces you to face the more philosophical question of “how much is enough?” It also prevents you from floating along in life without boundaries–which is chaotic and often will lead to a lack of freedom of real choices later on in life. Anecdotally, I’ve met many middle aged to older people still working in jobs they don’t enjoy–all the while wishing they could spend time with their children and grandchildren–because they cannot afford to do otherwise. I don’t know about you, but that feels a bit like forced indenturement.

I feel a little like Bishop from X-men cartoon series–the early 1990’s version. In the show he comes back in time to warn the X-men team of a grave future that can be prevented if they just listen (and follow) his advice. So, like Bishop, I’m warning you of an outcome that will happen if you don’t develop a spending plan and start investing–purchasing your freedom–for the future version of yourself. If not for you, do it for your children, your spouse, and for all of the opportunities you will be able to say “yes!” to and all the crap you can say “no” to once you no longer operate under the pressures of needing the almighty dollar: you have enough.

Coming back to point: How much money do you need to survive after cutting out all the extras? Once a spending plan has been developed and implemented, adjusted, and re-adjusted, and modified for the 10th time this year, you will have a good idea where you’re spending your money in the real-world and what you ostensibly value in terms of what you’re willing to give up your life for–when you earn a paycheck you’re trading your life for currency.

There is a difference between Survival money and living “normally.” Once you’ve gone through the strenuous exercise of developing your spending plan you’ll eventually come to your valued spending plan that reflects a physically fit yet comfortable “enough” budget that reflects a thriving lifestyle. Survival money is not full tilt “Normal living,” rather just the necessities—it’s food, shelter, utilities, insurance, transportation for work, etc. It does not include luxury spending, like “going out to eat,” or that new book from Amazon, or the 1000 channel cable package. Knowing what you need to survive, however, will give you a target number for the lowest level of Financial Independence.

C**ENTS-ability tip 3:** The *percentage* of your total net income that you spend is directly tied to the amount of money you’ll need to have in order to be financially independent. As Mr. Money Mustache rightfully states:

“The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect:

- it increases the amount of money you have left over to save each month
- and it
*permanently decreases*the amount you’ll need every month for the rest of your life”

So, THE Fun fact for today is: the lower you can reduce your “enough” number, the less you’ll actually need in investments, and the quicker you’ll achieve your freedom!

Without knowing the percentage number of your (1) spending and (2) your monthly investing you will not know when you will hit your “enough number.” That is a psychological nonstarter. Remember, this is as much a numbers game as it is a psychological/emotional game–this is why the first key to the FI kingdom is the belief that change can actually occur; that you can actually purchase your freedom in a relatively short amount of time.

Here’s how you find your spending percentage:

- Once you have developed your spending plan, then you’ll have given every dollar a home.
- Obtain the number you spend every month (the money you’re not investing).
- Take the number you spend every month and divide it by your total net income of the month.
- Then multiply it by 100 to get the percentage.

E.g. Jacob and Rachel bring home $5,500 each month ($66,000 pa.). They spend $2,545 each month on their expenses–that money is gone forever each month. But, combining both employee match contributions, they invest $3,855 ($800 of which is the bonus employee match). Take the $2,545 / $5,500 = 0.4627 x 100 = 46.27%. This is your percentage of spending.

To find out your investment percentage just do the same thing but with your investment number that you already know about from your spending plan:

- Again, once you have developed your spending plan you’ll have given every dollar a home
- Obtain the number you invest every month (remember to add in the bonus company match–this also provides a great psychological boost since it ups your % of money that’s going into investments!)
- Take the number you invest every month and divide it by your total net income.
- Then, multiply it by 100 to get the percentage.

E.g. As before, Jacob and Rachel bring home $5,500 each month ($66,000 pa.). They spend $2,545 each month on their expenses. But, combining both employee match contributions, they invest $3,855 ($800 of which is the bonus employee match). Now take the $3,855 / $5,500 = 0.7009 x 100 = 70.09%.

Since we know Jacob and Rachel spend $2,545 per month, which is $30,540 pa, we can find out their “enough number.” How? For a 4% withdrawal rate, multiply their annual $30,540 by 25, which is $763,500. To be safer, we’d also want to know what a 3% withdrawal rate would look like, so we multiply $30,540 x 33.33 to get $1,017,898. At a 4% withdrawal rate and saving $3,855 per month with no initial savings, it would take someone 11 years to reach their initial FI goal of $763,500 . For the 3% withdrawal rate, it would take someone 13.5 years to reach $1,017,898. This, of course, assumes a 7% annual real return. The sequence of return risk is real and could play out both positively and negatively–but this is why it’s recommended to follow the fourth Key to the FI Kingdom and purchase your freedom regularly, month by month, regardless of headlines and financial speculators. When you invest in VTI and VXUS, you’re making a bet that the world will continue to make a profit in the long term. The alternative is guaranteed inflation that slowly reduces the purchasing power of your money–day after day, week after week, year after year. If market fluctuations really get to you, consider holding 20-40% of your asset allocation in bonds. But remember, this will most likely slow down your accumulation phase of life and push back you entering the FI Kingdom by a bit.

I wish I would have known all of this when I was in my twenties, and so I just wanted to share that little bit with you in hopes that it’s helpful.

*Assumes dividends are reinvested.