Class just started, I made it on time fortunately and sat down ready to for that day's lesson in intro to business from my high school teacher.
Today's topic, personal finance.
Where did we start? Spending habits.
Our teacher spent the class outlining, giving a lecture, and walking us through examples of how buying a cup of coffee a day could be a personal finance disaster.
She was certain we are better off avoiding the cup of coffee and saving that money instead. She went into the time value of money, and compounding interest and much more. All great information to know and extremely useful when applied correctly.
Unfortunately this lesson did not teach us how to apply these topics correctly..
Yet, people everywhere still believe this silly idea that we should not buy coffee because it is ruining our budget, and causing personal finance suicide!
Please stop.
I'm thankful for the lesson from my teacher even though it lead me in the wrong direction at first.. eventually I learned how to use time value of money more, and take advantage of compounding interest, and most importantly how to apply these concepts to everyday life so I could evaluate what to do, and most importantly what not to do.
There are plenty of articles and teachers going on about how 1 cup of coffee a day, equates to around, $1,000 a year, which if applied interest at 6% over 30 years equals over $100,000! in coffee! Sounds terrifying, unfortunately it not only isn't true, it isn't relevant.
It's equally ironic that this was how she decided to explain these great principles, with a silly comparison to coffee spending... Meanwhile we were all month away from leaping into true personal finance suicide by choosing what college to go to... where interest is actually applied. Or maybe seeing how we are young adults who will eventually move on from college she should have addressed the number one habit we all have which often equates to personal finance suicide.. Buying a house. Where the loan actually is 30 years long.
While the hypothetical example of the cost of coffee over thirty years is great press, it's far more practical and true to learn about credit card debt, college tuition, how to buy a house without ruining your personal finances.
Again, these are all very practical situations almost all of us come across where interest truly is applied, and where there are terms for the length of repayment.
So let's do a little hypothetical time value of money example based on the widely popular coffee example.
If a cup of coffee a day, equates to $1,000 a year, and over $100,000 in 30 years if 6% interest is applied.
Then what happens when we jump into college carelessly or worse buy a house that could ruin our finances.
(Please don't think what you are approved for from a lender is what you can truly afford.. and never forget, the guidelines in place that allow you to buy a house aren't all that different from the ones that caused the 2008 financial crisis. You need to be smart and do your homework. Don't rely on anyone else, especially not lenders.)
I’ll do my best not to bore you to death here, stay with me.. :)
Let’s say we are PRE-approved by a lender for a loan of $305,000 for our first home. In no time we start looking in that price range.. Because, I mean why compensate when you can afford buying something that has everything you want?
Because there is always a trade-off.. You are always compensating. And you when you compensate to attain your wants in your house, you are often trading your comfort, peace of mind, ability to enjoy life and experiences outside of your house. Especially over the long-term.
But you are certain you are level-heading and thinking clearly… and you buy the 300k house you love because it’s still under budget right? You get a 30 year loan at 4%.. And you passed up the house that needed some work, was 5 miles outside your favorite neighborhood for 275k, and you ran out of the house on a great lot for 250k because it smelled a little like cat pee.. Actually, it smelled like it was power-washed with cat pee.
Here’s what that actually looks like.
(The loans, not the cat pee power-washer..)
Sooooo.. If you traded some short-term wants, you could have paid roughly the same monthly payment right?
I won’t even address the difference in interest.
Look at the difference in your total loan repayment!!!
From 300k to 250k the difference is 85,935!!!
Divided by 30 years for you coffee lovers is $2,864.50 a year.. You could ravel to Columbia each year and enjoy the best coffee on the planet with that savings… or you could buy 2 coffees a day at Starbucks for all I care…
I won’t belabor the point… find an amortization calculator and mess around with it yourself. As important as the loan amount input different loan terms. Not just for your house. Do it for your education, your car, boat, your golf habit whatever you want…
I’m not saying going to starbucks for breakfast lunch and dinner and every day is great personal finance choice.. I am saying that if you enjoy it and it maybe makes you more productive, then hedge your bet… Find another area in your life where you can offset that cost. Whether it’s buying a house that needs work, or a used car, or whatever.
You should live a life that makes you happy, makes you feel in control and empowered. Not one where you need to buy a brand of laundry detergent that sucks just because it fits your budget.
My frustration with personal finance being taught today is not that people aren’t stating facts necessarily, it’s that what kind of life are you living if you have to give up buying coffee to save money?
Learn more on this:
Online Amortization Calulator
https://www.calculatestuff.com/financial/loan-amortization-calculator
Article: An article that agrees with me
http://www.slate.com/articles/business/the_united_states_of_debt/2016/05/the_latte_is_a_lie_and_buying_coffee_has_nothing_to_do_with_debt_an_excerpt.html
Article: An article that disagrees
https://spoonuniversity.com/lifestyle/stopped-buying-coffee-everyday-and-already-saved
Video: Why rich get richer, and poor get poorer
https://youtu.be/abMQhaMdQu0