Have you ever sat down and thought about what that daily $3 coffee is costing you in lost savings? If you have, by the way, you're not alone, there's even a popular book about it called The Latte Factor. Or maybe you've decided to setup a budget - you download a budgeting app and start tracking each and every expense, only to abandon it two months later because it's just too much work.
With personal finance, it's easy to get caught up in the details of everyday expenses. However, author and financial expert Ramit Sethi in his book I Will Teach You to Be Rich, suggests a different approach: asking $30,000 questions before focusing on the less important $3 questions.
His idea is to prioritize significant and material financial decisions that have an outsized potential to build wealth, success, and happiness. That is, he suggests spending way more time researching and considering important life decisions versus trivial day-to-day decisions.
OK, so what are $30,000 questions?
Below, I've put together a list of some of the most common $30,000 questions you should think about - some will directly apply, some may not.
Major Purchases - in particular, vehicles and houses
Carefully consider the overall benefit and happiness you will realize making one purchase over another and compare that to the lost savings opportunity plus compounding effect of investing the difference.
Let's illustrate with one simple example.
You're 25 years old and have landed a good paying job. You've decided you must have a new pickup truck. Now, you could buy a Ford F150 4x4 SuperCrew for $74,950 (2023 MSRP), or you could buy a Chevy Colorado 2WD Crew Cab Short Box Base Model for $34,303 (2023 MSRP).
Now, I'm no truck guy. In fact, my 2013 Prius is the subject of much good natured ribbing among my truck driving friends, but I do know that the difference in price between the Chevy and the Ford is $40,647.
So, let's say that you think long and hard about the decision and finally decide to buy the Chevy. You're proud of yourself and by way of reward you plan to take one-week holidays to all inclusive Mexican resorts over the next seven years (for a total of $10,647). This still leaves you with $30,000 to invest. What would that turn into 35 years later when you are set to retire at age 60?
Well, at a modest 6% growth, that $30,000 turns into $230,583 thirty five years later. Yep, that's right...even though you still bought a brand new truck AND you took seven awesome holidays partying hard with your friends at a cool resort, you still have over $230,583 more at retirement than if you had purchased the Ford.
Investing in Yourself
Your own earning potential or "Human Capital" as it is often called is your best lifetime investment. You will earn far more in salary and wages than you will from investing. This is especially true for young people just entering the workforce. Invest in yourself by learning new skills that can enhance your earning potential and open doors to better opportunities.
For example, my nephew works as a teacher in BC and, like most provinces, BC uses a pay scale based on several factors including years of teaching experience and level of education.
When he was still early in his career, and using some of his own funds but also drawing on education funds provided by the province, he enrolled in a masters level education program. Two years and some hard work later, he obtained a higher education certification which then resulted in decent-sized salary bump. Not only did my nephew enrich his personal education and learn new skills, but he also quickly became better off financially with a permanent salary increase that will end up spanning his entire teaching career.
Negotiating Salaries
Think about ways to convince your employer to pay you what you’re worth. This can often go hand in hand with investing in yourself - the more skills you have, the higher your wage should be too.
Some years ago, and right after a successful sales year where I exceeded my targets, I was offered the same base salary and commission structure as the year prior. I was even told that "nobody was getting a raise this year". As you might suspect, I wasn't happy about this.
So, what did I do? I got down to work. I pulled out a spreadsheet, calculated my base salary and commission structure over the past three years and compared it to the general inflation rate. I saw that my total compensation trailed inflation by about 5% over that three year period. Next, I thought carefully about how I could sell my pitch for a raise to management.
The result? I pitched a 0% increase to my base salary but a 15% increase to my variable commission. This still (sort of) met the company criteria of "no raises" while also creating a win-win - if they do better, I do better too. It was approved with no push back from my employer.
Reduce Investment Fees
As I noted in an earlier article, most Canadians are still paying too much in investment fees. Take the time to review and research your existing investments, especially the fees you pay, and then take action.
As a quick refresher, a simple 1% reduction in fees you are otherwise paying to mutual funds, advisors (or both) can save you hundreds of thousands of dollars over your investing lifetime.
On a personal note, I held major bank mutual funds paying over 2% in management fees for many years never really looking at them and trusting the bank's "skill" in investing. Yet low cost low-cost exchange traded funds (ETFs) were introduced in Canada in 1990 and were mainstream by the early 2000s. It took me until 2019 to get on board with this evidence based and proven strategy while I lost more than I care to admit to high fee investments that delivered me less in return. This remains my number one financial regret to this day.
Increasing your savings rate
I can see your eyes rolling already - so you ARE asking me to budget, to sweat the small stuff, and to penny pinch to squeeze out more saving for retirement! Well, sort of, but how about this instead - try a reverse budget. Instead of wondering where your money disappears to each month, just pay yourself first.
Remember the old book by David Chilton called The Wealthy Barber? His most important and enduring rule for that book is to “pay yourself first” by taking 10 per cent off every paycheque.
Today, you can easily do this using a discount brokerage account to setup an automated withdrawal to invest in, say, a low cost index ETF. If you never see the money, you'll never spend it. You can spend the rest knowing your savings are tucked away - no budgeting, no fretting over small purchases, just go ahead and spend what's left in your account.
Then, to put this strategy over the top, when you get a raise or when you pay off certain items like a car loan or line of credit, take most of that extra cash-flow and increase the automated savings amount to pay yourself even more.
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