To give this conversation a more concrete example, here is (linked below) a calculation of saving $5 a day over 40 years, in real (inflation adjusted) dollars, assuming returns on invested assets are 7% per year. This is a realistic number based on >100 years of U.S. real (inflation adjusted) stock performance. You end up with $377k after 40 years.
In my opinion, a lot of Americans and people around the first world live paycheck-to-paycheck because they adjust their consumption to match their income. There are people that live paycheck-to-paycheck at all levels of the income distribution. The power of saving adds up more than people think. The author of the article may very well be rich and successful because his $5 daily coffee frees up his mental bandwidth enough to concentrate on his billion-dollar daily problems. However, many poorer folks need to learn self-control and the power of saving. His advice is not actionable.
To use the featured quote against him:
>If spending $5 a day on fancy coffee puts your retirement at risk, you’ve got bigger problems.
Yes. The bigger problem is that many grown adults are financially ignorant. Spending $5/day on a pure luxury despite being flat broke is a symptom of this ignorance, but analysis of this symptom can lead to self-reflection and better behavior.
7% real return is a relatively high assumption. In the article Ritholtz assumes 8% nominal returns and 2-3% inflation, so 5-6% real returns. Even assuming 5% real returns is somewhat optimistic. Developed countries in the last 100 years or so have achieved that, but most places in most time periods have not.
It is true that the U.S. over the last ~150 years has outperformed a lot of the world, but it maintained 7% real over that period of time. Ritholtz was all over the damn place in his article, and attacks the strawman of 12% growth. In comparison 7% has some backing.
Due to volatility, it is unsafe to retire on a planned drawdown rate of 7% (4% is a good rule), but it isn't unrealistic to expect 7% growth.
I'd argue that you can beat the market. And poor people especially.
What? Heresy? No I don't mean by stock picking. I mean by investing in yourself. Imagine if you save up enough money that you avoid having to take out a payday loan. Or imagine if you have sufficient money that you aren't in chronic stress mode, and can think about your long term future instead of worrying about the next meal. Or being able the upfront cost of bulk buying. Or maybe you can buy high quality tools and gear that allow you to do your job more efficiently.
If you can start a virtuous cycle in your personal finances that can create huge excess returns.
Yes, this. Plus the people spending $5/day on coffee are potentially also spending $10-40/day on eating out, taking on too much in car payments, spending too much on clothes, spending $100/week at bars, etc. It's not the coffee in isolation that's the problem, it's the sum of your financial decisions that is, and a daily $5 latte is just one not-insignificant factor.
> However, many poorer folks need to learn self-control and the power of saving.
Counterpoint: the many ways that our economic system can wipe out whatever savings you might have (medical costs, unemployment, legal costs that fall heaviest upon the poor) make spending money on pure luxury - or even the lottery for that matter - a perfectly rational action.
If you don't believe your savings will be there tomorrow, why not spend it today?
I know this is well studied and has to do with the poverty mindset, but that doesn't mean it's mathematically rational. Sure, if you live paycheck to paycheck and somehow this week have an extra $5 leftover, you might as well spend it. But if you have $80 left over, after a year of saving you could have a reasonable emergency fund.
I think this has far more to do with the fact that poverty, especially in the US, means frequently going into debt or bankruptcy even just to survive. If you're working for minimum wage, your landlord raises your rent, and you get an unexpected medical expense at the same time, no amount of disciplined saving in $5 increments is going to save you.
>One of the major problems for an investor looking at that 10% average return figure and mistakenly expecting to realize a nice yearly profit from investing in the S&P 500 is inflation. Adjusted for inflation, the historical average annual return is only around 7%
Here is the structure of the spreadsheet (had to rebuild it real quick, didn't save the original):
https://imgur.com/a/jOaHUoT
In my opinion, a lot of Americans and people around the first world live paycheck-to-paycheck because they adjust their consumption to match their income. There are people that live paycheck-to-paycheck at all levels of the income distribution. The power of saving adds up more than people think. The author of the article may very well be rich and successful because his $5 daily coffee frees up his mental bandwidth enough to concentrate on his billion-dollar daily problems. However, many poorer folks need to learn self-control and the power of saving. His advice is not actionable.
To use the featured quote against him: >If spending $5 a day on fancy coffee puts your retirement at risk, you’ve got bigger problems.
Yes. The bigger problem is that many grown adults are financially ignorant. Spending $5/day on a pure luxury despite being flat broke is a symptom of this ignorance, but analysis of this symptom can lead to self-reflection and better behavior.
Savings Calculation: https://imgur.com/a/Au00aeJ