Drink water, save $46,000

The "latte factor" has been well documented in personal finance circles, but I thought I'd bring you another example of the effect . . . this time revolving around dinner beverages.

Suppose you are 25 and going out to eat, though expensive in itself, is something that you like to do and don't want to give up in order to be more frugal. Suppose also that you go out to eat once a week (we go out more frequently than this, unfortunately). How often do you order a soft drink, tea, or other beverage? For many people, this is just part of their meal. They get a Coke or a tea or some other favorite fountain drink. How much is this costing them?

Let's assume the drink is $2, which is on the low side for a sit-down restaurant. Ordering water instead will save you $2 per meal, once a week. Starting on your 25th birthday, you save this $2 every week, and at the end of the year, invest it in an index fund. Over the next 40 years, your money ($104 each year) grows at 10% annually. How much of a difference does this make to your retirement fund?

$46,029.

Wow! Opting for water instead of a soft drink can add more then $46,000 to your retirement fund.

Let's play with this a little more. Suppose you're a beer drinker, and at your weekly dinner you usually order 2 beers instead of a soft drink or water. Most places, a beer will cost you $3 or somewhere north of there. Let's assume $3, for a total of $6 per week. How much would the practice of ordering water instead add to your retirement fund at 65?

$138,089.

What if you like fancier beers @ $4 a pop?

$184,119.

What if you like to get a couple of glasses of wine instead-- nothing fancy, just a house wine-- at a rate of $6/glass?

$276,178.

More than a quarter of a million dollars for 2 glasses of cheap wine per week.

To me this illustrates 2 very important points. One is the power of compounding . . . you're putting in just $624 per year from your wine savings ($24,960 total), and when you hit 65 it's worth $276,178.

The second is how much of an impact your small spending/saving/investing decisions make. $2, $6, $8, or $12 may seem like very little compared to your salary or your portfolio value, but over time, I think we can all agree . . . $46k, $138k, $184, $276k . . . not small potatoes.

I'm guilty of straying from this pretty frequently . . . particularly for beer. But I try hard to avoid it, since beer in the store is SO MUCH CHEAPER than beer in a restaurant. I try to drink water with my meal, then go home and have a couple of beers at less than $1/bottle. Seeing the impact of decisions like this on my financial goals is a bit of an eye opener . . . one that you know is true, but when you see it in print, really smacks you in the face. Also keep this in mind-- if you like more expensive drinks or drink more of them, or if you go out to eat more than once per week, the magnitude of your decision is even greater.

So give it a shot. Start drinking water and earmark your savings for deposit in your Roth IRA. Your retirement will thank you!