Thursday, June 23, 2011

Wait One Day

Warren Buffett apparently calculated that the money to spend on a haircut when he was young would be equal to $300,000 when he was older. His solution was fewer haircuts. Similarly, waiting to pay a bill so that you can earn interest in the meantime earns you money. By waiting even one day you can end up saving serious money. For example, at my bank I earn $0.01 per day on every $350.0 in my saving account. If we say that I spend $7 at the coffee shop on a latte and a muffin, if I do that twice a week, but I delay each purchase one day then I would earn $0.02 over the course of the year.

Where this gets better is the compound interest and frugality at the same time. What if I go a week without going to the coffee shop? I would save like $13. If I went four times the next week, I would spend all of the money I budgeted, but that $13 ($.50 cost of coffee at home) would earn a weeks worth of interest.

This all seems like small potatoes but if you are spending several hundred dollars per week on food, clothing, entertainment, and other things and getting any better than 1% interest (like 8-9% from international corporate bonds) then suddenly waiting a day or a week to go out sounds like a good idea. Of course, if you can go one day or one week without something, maybe you can go two weeks? If you can do that, then maybe a month. If you did not need that thing for a month, maybe you don't need it at all.

1 comment:

  1. Very well said. This is a great point and one that the instant-gratification crowd could really learn a lesson from. I do think that patience is an easier thing to realize for experienced long distance runners who are used to working for a long time towards a single goal. So while you and I can easily put this into practice, I think that a lot of people will have a lot more difficulty.