Over the weekend, an article in Market Watch caught my eye.
Suze Orman wants you to stop ‘peeing $1 million down the drain’
I’ll spare you a click and let you know that this is based on the premise that saving a little more than $3 on coffee a day would turn into $1 million, after 40 years at 12% in a Roth IRA.
She further goes on to say “You are peeing $1 million down the drain as you are drinking that coffee. Do you really want to do that?” Guess we all now need to stop eating food as well since we know how it ends up. LOL.
Numerous financial “gurus” have touted a variation of this “Latte Factor” theme with amazing regularity ever since David Bach popularized it in his book The Automatic Millionaire.
First of all, I am not sure where Suze is getting 12% in a Roth IRA. But it is exactly this expectation of unrealistic returns which led to Suze investing in options with a stock broker; and losing all her investor’s money in her early days. But more on that later….
Second of all, I totally disagree with Suze and other financial “gurus” that cutting your daily coffee will have any significant impact on your Financial Freedom. If you are in debt, then by all means be ruthless about cutting every single expense from your life. There is a time and place to be fiscally responsible.
Instead of cutting a $3 expense, you are better off reducing your biggest fixed costs, automating your investments and earning more. You can only reduce expenses to a limit, but you have so much more potential to increase your income. If your income potential is limited at your day job, go ahead and look at building up a side hustle. For example, side hustles by teachers are common since their pay is generally fixed unlike working in the private sector.
Cost benefit analysis of $3 coffee
For every expense, it is necessary to do cost benefit analysis with respect to the value of eliminating it. For the larger fixed cost expense, is it worth it? Absolutely!
But for a $3 coffee, would the savings be worth the deprivation and the added stress of decision fatigue? For every small day to day purchase, if you have to constantly decide whether to go for it or not; you will soon find yourself getting tired with “decision fatigue”.
Decision fatigue is a well-researched and documented phenomenon which indicates that constant decision-making leads to deterioration of our ability to make good decisions.
In fact, if we apply a more realistic 7% rate to the savings obtained by cutting our daily $3 coffee, we arrive at $250,000 in retirement. Every single day from now till we are 65, I am sure we will all be miserable by eliminating this one small item which brings joy in our life.
This is a problem many in the personal finance community struggle with on a daily basis. Going overboard with cutting out the simple pleasures in life will make the journey harder than it needs to be.
It will only cause anger and resentment; and your loved ones around you will bear the brunt. Is it really worth it is a question you need to answer? Brandon from the Mad Fientist is candid with his experience
“I avoided anything that cost money. Financial Independance was the main focus so I didn’t want to do anything that would delay me crossing that finish line. As I got closer and closer to my goal, however, the unhappier I became. Isolation was what initiated the unhappiness but I continued to isolate myself more and more, which further increased my unhappiness.”
He mentions no joy and a downward spiral Luckily, he snapped out of it by visiting friends and family.
Spending time with loved one’s results in creating some of our happiest memories. It makes the journey to Financial Freedom all the more enjoyable.
Remember, this is a marathon; not a sprint. So don’t be afraid to spend money if it involves meeting friends for coffee or dinner. Human beings are social animals. No one can live as an island journeying through life alone.
So how to be really rich like Suze Orman?
Suze Orman worked for 7 years as a waitress at the Buttercup café in Berkley, California.
She dreamed of having her own restaurant. Because of her work ethic, few of her customers wanted to support her dream and loaned her $50,000.
Without educating herself on how the risk/return profile of different assets; she handed her money to a broker at Merrill Lynch who invested in options and lost it in a market downturn.
Suze then went on to work for Merrill Lynch and studied to become a stock broker herself. She leveraged her Human Capital and continued to progress in her career becoming a VP of Prudential Securities before leaving to start her own financial firm.
Suze then went to leverage her social capital. Published books, appeared on CNBC and Oprah. Became a consummate marketing machine managing her own brand.
She now has a personal fortune of approximately $33M, flies on a private jet and lives on an island in the Bahamas with her partner.
Do you think Suze Orman reached $33M net worth by skipping coffee?
Was it because she progressed from a waitress to a stock broker to a business owner to a media mogul?
I respect the fact that Suze Orman became so successful from her early days working as a waitress and is trying to provide advice. However, it would be really helpful if her advice was not centered around cutting a $3 coffee. But instead encouraged people to actually hustle at their job, spend time learning new skills to get a higher paying job, seek investments for a business from your customers and then start a business with the accumulated money.
Suze Orman story is a classic case of “do what I say and not do what I do”.
Focusing on tiny expenses that do not move the needle; will not accelerate your Financial Freedom Countdown and in fact make your daily life miserable. Instead concentrate on fixed large expenses and automate savings.”]
If you want to be successful, make sure you focus your energies on leveraging your Human and Social capital as Suze Orman did.
Go ahead, have your daily coffee. I am sure it will put you in a better mood and also help you focus on doing your best today!
Readers, what are other examples you have seen where the advice dished out for soundbites is not really helpful?
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
M1 Finance: John compared M1 Finance against Vanguard, Schwab, Fidelity, Wealthfront and Betterment to find the perfect investment platform. He uses it due to zero fees, very low minimums, automated investment with automatic rebalancing. The pre-built asset allocations and fractional shares helps one get started right away.
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Credit Karma partners with Equifax and TransUnion and offers free credit reports and free credit scores updated weekly. It also provides alerts when it detects unusual activity on your credit files. Monitoring your credit report for errors can save you thousands.
Fundrise: One of the top real estate crowdfunding platforms for non-accredited investors. Sign up for free and look at passive real estate investment opportunities with low minimum (only $10).
DiversyFund: is an excellent choice for non-accredited real estate investors with low minimum (only $500) offering automatically reinvested dividends.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
PeerStreet has a low $1,000 minimum, which allows for better diversification for real estate accredited investors. You can define the criteria based on rate, LTV, duration, etc., and use their automated investing feature to place you into investments that match your criteria. Or manually select the investments.