Monday, August 14, 2006

Principle #10 - Small Things Are Meaningful

When it comes to saving and investing, small things can make a big difference to your longer term returns. The old saying "don't sweat the small stuff" could not be more wrong.

A penny saved is a penny earned is another old saying. It would be more accurate to say that a penny saved is $0.01 * (1+((100-marginal tax rate)/100)) earned. A penny saved and invested each day for 40 years is $457.81. This is a lot more that the $144 actually saved. (Assumptions: $0.30 invested at the end of each month for 40 years at a 5% rate of return.) If we do this with dollars instead of cents, the numbers get very big very quickly. Increase the saving from $0.01 per day to $1.00 per day and the end result after 40 years is $45,780. Somebody once used the example of a poor couple who had smoked a packet of cigarettes a day for most of their adult lives. If the money they had spent on that packet of cigarettes each day had been invested in Phillip Morris they would have been multi millionaires - instead of near broke. Small things add up and are meaningful.

Another example is rates of return. You might think that the difference between earning 6% pa on your money and earning 7% pa is quite trivial. It's not. Over a long enough time period its the difference between out living your money and a comfortable old age.

Do sweat the small stuff.

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