On May 28th, 2014 there was an article on Bustle.com reporting how Starbucks baristas had served the most expensive drink ever. It’s called the Sexagintuple Vanilla Bean Mocha Frappucchino, and it’s pretty much death in a glass. A 128-ounce glass with 60 shots of espresso and costs a whopping $54.75! So this got me thinking, not only is this DEATH IN A GLASS, it is also DEATH TO YOUR RETIREMENT PORTFOLIO!
In 1996 Thomas J. Stanley and William D. Danko wrote a book called, “The Millionaire Next Door.” They described the surprising secrets of America’s wealthy. What are just a few of the characteristics they talked about?
Millionaires don’t look like millionaires, dress like millionaires, eat like millionaires, act like millionaires, and they don’t even have millionaire names!
- They live well below their means. They wear inexpensive suits and drive American-made cars. Only a minority of them drive the current-model-year automobile. Only a minority ever lease their motor vehicles.
- Most of them have never felt at a disadvantage because they did not receive any inheritance. About 80 percent of them are first-generation affluent.
- About two-thirds of American millionaires are working, the rest are retired. Those who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires.
In a nutshell, they are not flashy. They live below their means, they work hard, are very entrepreneurial, and they save and invest what they don’t spend.
So, let’s get back to the coffee. I know a person who would go to the coffee shop every day and get a frappaccino. Let’s not be ridiculous with the $54.75 frappaccino. Just a basic frap is $4.25. If my friend would invest that $4.25 instead of drinking it the results would be AMAZING! From age 20 to 65 (when most people want to retire), investing $4.25 Monday through Friday instead of drinking it, and having that grow at 15% annually, my friend could accumulate a lot of money. Let’s do the math.
$4.25 cup of coffee for 22 days a month = $93.50 per month on coffee
WHAT IF SHE CUT THAT OUT AND INVESTED IT. As we learned in previous lessons, there is a time and place for everything. A buy and hold forever strategy is a foolish allocation. Day trading is also foolish. But, IF YOU ARE A STUDENT OF HISTORY and a STUDENT OF THE MARKETS you can identify the major trends and take advantage of them so those trends don't take advantage of you.
In working trough this example, let's assume a 12% annual growth rate on your investments. Why 12%? Isn’t that kind of high? Well, let’s look at the trends:
1980-2000 the DJIA grew 1404%, that’s a compounded average of 14.5% a year for 20 years!
From 1970 to 2000 U.S. average real estate prices grew 593%, or an average of 10.7% per year.
For the decade of the 1980s you could have averaged 9.46% per year with bonds.
But, nothing lasts forever, when you are a student of history and a student of the markets, there are signals you can look for that can indicate that a trend is about to change. This happened in the early 2000s. From 2002-2014 Gold has grown from $278 per ounce to $1230. That’s a 342% increase in 14 years. Or 13.1% per year average. Silver is similar, growing from $4.57 per ounce in 2000 to $20 per ounce in 2014. That’s an average annual return of 13.1%.
So, by understanding the trends, allocating into the right place at the right time, 12% per year all of the sudden doesn’t seem outrageous, but actually quite a reasonable expectation over time with a properly diversified portfolio that maximizes your return and minimizes your risk.
So, back to my friend. Instead of her coffee, if she invested that $4.25 per day into a growing trend from age 20 to age 65 how much do you think she would have saved up? Just from cutting out coffee and saving $4.25 per day? $10,000, $50,000, $100,000
NOT EVEN CLOSE! At age 65, not adjusting for inflation she would have $2,026,073.94. YIKES! Not only will the cup of joe with 60 shots of espresso probably kill you, but going out for coffee every day should have just made you sick! $2 MILLION DOLLARS is what those cups of coffee cost.
In economic terms this is called the opportunity cost, or the best forgone alternative if you would have done something else with your money.
Now, replace my friend with you. Imagine how much you could have if you cut your cable TV package from the highest to the lowest package. Instead of eating out once per week you went out once per month. Instead of going to a movie you rented one. Examine your life. Just think of all the things you could cut out. I’m not suggesting you cut out everything. STILL HAVE FUN AND ENJOY LIFE! But, if you invested what you cut out into the right places at the right time, all of the sudden your retirement could look AMAZING instead of something to fear and lose sleep over.
In closing, here are 3 strategies for a prosperous retirement while still enjoying life now!
- LEARN TO LIVE BELOW YOUR MEANS
- FIND FUN THINGS TO DO THAT ARE FREE
- INVEST IN THE RIGHT TREND AT THE RIGHT TIME