In a society that gets more fast-paced every day, it can be difficult for people to fully grasp the fact that the more you spend now, the less you’ll have later. Impatience seems to be on the rise, and understandably so.
It’s something that practically every parent has said to their children at some stage when handing over pocket money, “Don’t waste it all on treats now. Save some and you can get that new (fill in your larger luxury toy here) by the end of the month,” or year depending on your generosity and their ambition. Yet those same parents will then happily hop in the car and go buy a new television, phone, BBQ or whatever, without considering the hypocrisy of their actions.
The same philosophy applies in both cases. Spend more now and you may find that you can’t afford larger luxuries later on. In the case of adults, this will generally mean the standard of living you can enjoy in retirement. In fact, it can also heavily influence when you are actually able to retire.
The retirement age (which is actually the age pension eligibility age) is heading towards seventy and with increasing life expectancies it will realistically only get higher, not lower, in the more distant future. The preservation age, which is when most people can access their superannuation savings, is also likely to creep up (it generally sits around ten years under the retirement age). This means that if you are relying on receiving a pension, or have all your money tied up in your superannuation, you will be restricted in how early you can retire.
Prices are wide-ranging, but for the sake of argument, let’s say a large, good-quality television currently costs around $3,000. Let’s also say that a newly employed twenty-year-old purchases that television with their first month’s salary. What if they saved that money instead and invested it? A seven per cent return is generally considered average over the long-term for a balanced share portfolio, so what would that $3,000 turn into if it was invested at age twenty for retirement at age seventy? $88,371. That’s right, almost ninety thousand dollars!
What about some of those smaller, more frequent purchases? A coffee every morning before work doesn’t seem like much – probably only four or five dollars a time – but four dollars five times a week for forty-eight weeks a year? That’s $960 a year. You might think that will give you less than the large-screen TV, but remember, you drink coffee every work-day, every year, so you will be adding that $960 to your savings each year. So what would that give you at 70 if you started when you were 20? $390,267. Only cut out half your coffees? You’ll still save almost $200,000! And that’s just from cutting back on coffee – which is probably good for you anyway.
Got an eye on a trip to Bali? $999 would turn into almost thirty thousand dollars in fifty years. What about a year’s worth of Foxtel? If you have the Sports Combo, which currently costs $787 for twelve months, you would have an extra twenty-three thousand at retirement. And that’s just skipping one year of Foxtel, not getting rid of it forever!
Of course, inflation means that all those thousands will be worth less in the future. Inflation generally increases at about 3% per annum, so that $3,000 television would cost you $13,151 in fifty year’s time; however, the 7% growth (including stock prices and dividend returns) that is used is based on the last 50+ years of the top 500 American stocks and already accounts for inflation – in raw terms the increase has been closer to 11% per annum. At that rate, your $3,000 would be worth over half a million dollars in fifty years, but the effect of inflation brings it back down to $88,371.
Now you have an idea of just what you are missing out on with every luxury purchase – especially early in your working life. If you also consider that people who focus on saving will most likely continue to make additional contributions to those savings over time, you start to get an idea of just how much difference it can make to your retirement fund. Just imagine what happens if you skip the trip, cut out the coffee, and ditch the TV and Foxtel!