Small Amounts Add Up
Whether it's cutting expenses or contributing to a savings goal, it's important to understand the value of small changes. We've outlined a couple ways that small amounts can add up in your own life.
Our expenses can add up quickly. Here are a few ways that our daily spending choices could compromise our goals:
- A $1.50 soda every day costs $547.50 per year.
- A $4.50 coffee every day costs $1,642.50 per year.
- Eating out five times a week at $8 per meal costs $2,080 per year.
For more examples of how small amounts add up, see University of Illinois Extension's Small Amounts Add Up worksheet.
The difficult part of cutting expenses isn't doing the math; it's making changes to your habits. Below are a couple ways to ease into the transition once you've identified something you want to cut.
Consider stepping down your spending rather than cutting it out completely. Ease into eating out less often by eating out less often each week over a period of time. For example, if you are currently eating dinner out 5+ times per week and want to reduce that to 1 time per week, try the following:
- Week 1: dine out 5 times per week
- Week 2: dine out 4 times per week
- Week 3: dine out 3 times per week
- Week 4: dine out 2 times per week
- Week 5: dine out 1 time per week
If you're like most of us, food is one of the most variable expenses in your budget. Check out our How to Save on Food course on moodle or our webinar recording to learn other ways to save on this expense.
There are many ways to comparison shop, especially with the apps and websites we have access to now.
If you're comparing prices of food, you'll want to pay close attention to unit pricing. For example, if you're comparing the cost of apples, you'll want to look at the unit price of cost per apple rather than the cost of a bag of 7 apples compared to a single apple.
If you're comparing the cost of services, like internet or trash & recylcing pickup, you'll want to read or ask about the features of those services so you're comparing prices that correlate to the services that you want.
To maximize how small amounts add up, let's look at the time value of money and compounding interest.
Time Value of Money
If you start saving when you're young for longer term goals like retirement, you can save less with interest-bearing savings tools than if you start later in life or if you don't use an interest-bearing tools. An example of an interest-bearing savings tool would be an investment account, like a mutual fund, that can keep up with or exceed the rate of inflation over time.
Let's say you start contributing to your retirement at age 22 and are able to contribute $4,000 every year until you're 30. For contributing $36,000 over 9 years early in your career, you would have $1,063,244 (assuming a 9% rate of return on your investments). If you waited until age 31 to start contributing $4,000 per year and contributed every year until you retired at age 65, you'd save $140,000 over 35 years, but only would have $862,843 at retirement (assuming the same return on investment of 9%).
As you can see, you can build your savings by starting small, making incremental changes to habits, and leveraging the power of time and compound interest to help you achieve your goals.
What ways do you use small amounts to help you accomplish your financial goals?