What latte can do to your finances

YOUR e-mail messages and comments totally had me floored. Thank you for your interest, thank you for welcoming me to the blogosphere, and thank you for inspiring me. What began as just another interesting project has become a worthy cause.

It’s particularly cool to receive e-mail messages from the 20-something group. Y’all know what it felt like to be a college grad — the whole world seemed to exist to amuse you. You feel like you’ll be 20-ish forever. But read this e-mail from Patrick Mineses:

I was reading your blog, Money Smarts, and became interested in discussing financial goals because I really don’t have any direction on that matter. I guess you could describe me as a typical fresh graduate of the IT industry, lives with his parents, but also tries to contribute to household expenses. I have a little savings that I’ve built up through the years.

Patrick is lucky to have escaped that malady that infects many in this age group: an inability to think about the future. One of the most important concepts in personal finance is time value of money. Yeah, it’s a mouthful (and there are a thousand technical definitions out there) but it all boils down to the fact that those who start early have a bigger chance of retiring in style because they have more time and can consider more options to grow their money. Patrick, time (can you hear Denzel Washington humming that eerie song) is on your side!

Now, let me transport you to Metrowalk or Eastwood on a Friday night. Chances are you’re going to be eaten by a crowd of latest-mobile-phone flipping call center agents speaking with a New York accent, nursing a Starbucks latte. Some of them would be standing near café entrances trying to finish their cigarette as if they have a deadline. Here’s a challenge and I hope you really do win. Can you find me at least five in this crowd who save as much money as they fork over at Starbucks?

Skipping the daily latte means you save around P150 per day. That translates to P3,600 a month on a six-day working week or P43,200 a year. That can already buy you a decent life insurance policy. Invested over a five year period with a compounding 5% interest, your latte budget can give you a cool P55,135 smackaroos! (Before latte drinkers crucify me, this also holds true for all other things we buy that we can, in fact, live without.)

Let’s look at the not-so-sexy flip side. Around 42 years ago, 1,000 shares in PLDT would have cost P46,000. I know, that must have been a big amount of money back then, but bear with me please. If you were 20-something then, and bought 1,000 PLDT shares, and held on to your shares despite the eruption of Martial Law, the EDSA revolution, the Asian financial crisis, and sold your shares today, that would mean an additional P2.36 million you can spend on all the latte that you want!

Of course, the choice of stock is also crucial and no, I’m not particularly recommending PLDT. You could have invested in a company that turned out to be a dud and now your shares would be worth nothing. But this illustration shows that whatever your choice of investment and whatever the strategy you used, you would have a bigger chance of winning if time is on your side. You can even refine and redraw your plan when it’s not giving the expected results.

Bottomline, it pays to start early. Kudos to you Patrick, and many of you out there who are members of the 20-somethings that are already craving for financial independence. If someone from the Department of Education or universities is reading, please include financial planning in our general education classes. Over at UP Diliman, our kids are really asking for it.

Note: All photos courtesy of the Lopez Memorial Museum Collection of old newspapers.

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