Our spending and saving habits can make a big difference to how much our wealth grows over time, as it influences how much money is available to invest in ASX shares or other assets.
While it's obvious that how much we pay for our home and transportation (the big spending categories) make a difference, there's a cliché that spending regularly on a coffee (or, several years ago, it was avocado on toast) was holding people back from financial success.
I'm going to take a look at how much of a difference it could make to invest the daily coffee money instead.
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Every dollar counts?
In modern life, spending money is largely unavoidable. Some people may decide to spend a bit of their discretionary budget on items that give them a bit of joy or a boost. I'm not going to say people shouldn't spend a bit of money on themselves.
But, if growing wealth is a key goal for someone, then it could be a useful exercise to analyse where extra dollars could be found.
When we think of a regular discretionary item, such as a $7 coffee, it doesn't sound like much. But, when expressed as a weekly amount of $49 or an annual figure of $2,555, it sounds more sizeable. Those little amounts do add up – $1,000 is made up of 1,000 individual dollars.
How much could the amount grow to if someone invested that amount?
The power of compounding with ASX shares
Saving and investing $7 per day (or $2,555 annually) for a number of years could become a very useful figure after a decade and even larger after two decades thanks to compounding. That's particularly true if someone's investments grow at an average of 10% per year, as the global and ASX share markets have done over the long-term.
Using the Moneysmart compound interest calculator, after 10 years the daily coffee amount would grow to $40,720 and after two decades it'd become $146,338.
While that's not enough to retire on, it's clear that it could be a very useful contributor to a typical Australian's finances after a decade.
So, a $7 daily coffee is not stopping someone from becoming very rich. But this does show how a small daily amount can compound into a pleasing figure over time if it's put into assets like ASX shares rather than spent.
Now imagine how much someone could have in 20 years if they deliberately saved and invested $50 per day towards building their finances.
