Impact of Saving a Few Chronic Dollars with Compound Interest

Up until recently, I would not call our lifestyle frugal, but rather conservative. We have had fun with our money, but looked for ways to save money at every opportunity. I received some good advice when I was starting my career. My boss told me that with every raise, take half of it and invest it.  I directly deposited half of every raise into my stock account.  We have been doing this for years and have accumulated a pretty good net egg. Even with this philosophy, we have spent our money on some big items. It seems we either go big or go home.  After all, you only live once and the kids are only young once. A story for another blog entry.

Our mindset has changed since we met Mr. Money Mustache.  We are now looking at everything we spend money on as either a necessary expense of life or as a missed opportunity to invest.  We want a different lifestyle and in order to do that, we need to invest at every opportunity.  When you take this mindset, you analyze every expense, especially those that are chronic.  MMM uses an easy calculation to determine your ten year return on that opportunity to invest.  Simply:

• to calculate a weekly expense compounded over ten years, multiply the price by 752

• for a monthly expense, multiply by 173

The important word in this calculation is compounded.  Compounding interest is a very powerful thing.  A good explanation of this concept can be found at The Simple Dollar's post on How "Letting Your Money Work For You" Really Works.

For example, if you go to lunch every day spending conservatively $8 per day or $40 per week, trimming that expense and investing it instead gives you $30,080 (752*$40) after ten years of compounding.  Gonna brown bag it tomorrow?

If you can look at everything you do using these calculations, you can really see how reducing chronic spending can lead to big returns in the future.

 Photo credit: orangeacid / Foter / CC BY