Buy low. Sell high. Save 10 per cent of your income. Pay yourself first. Automate your contributions.
There's no shortage of advice when it comes to money.
A lot of it focuses on reducing spending, and it's not necessarily bad advice. Minor spending habits certainly do add up, and any strategy that helps you spend less and save more obviously has its merits.
But the problem with this kind of advice is that it ignores the more impactful money decisions that we tend to overlook; the financial heavyweights like mortgage rates and insurance premiums. By focusing on the small, everyday expenses — to the exclusion of the more consequential stuff — we're being "penny wise, pound foolish."
Here are two different comparisons to help illustrate my point.
Avocado toast and car insurance
I hate to kick a horse when it's down, but the almighty avocado toast theory deserves what it has coming. In a nutshell, Australian real estate mogul Tim Gurner argued that by splurging on expensive brunch items, millennials have squandered their chances of entering the real estate market. Unprecedented student loans, disappointing job prospects and global recession be damned. It was the sliced fruit on toast.
But let's break it down. Say you spend $10 weekly on the insta-worthy dish. That means $520 per year. Admittedly, that's some serious coin to drop on brunch. But remember, the accumulated savings can only be realized by giving up something you love for a full year. Not exactly an easy or quick thing to do.
Is it reasonable to expect yourself to give up something you love for a full year?
Now let's look at car insurance. Say your premium is $2,000 annually, or $167 per month. Well, chances are you're probably paying more than another insurance company is offering. In a recent analysis of quotes on our website, we found that annual premiums offered by different insurance companies for the same driver varied by nearly $1,000 a year. That comes out to $83 a month; put another way, it's probably more than you're spending on avocado toast.
Verdict: There's considerable money to be saved with both approaches, but is it reasonable to expect yourself to give up something you love for a full year? Or for longer? It can be done, but it's nowhere near as quick or easy as putting in a little bit of effort into comparing car insurance.
The latte factor versus mortgages
The latte factor is a popular piece of money-saving advice that states by skipping your daily cup of joe, you can save surprising amounts of money over the long term. While there's no doubt that's true, let's see how those savings stack up against a tweak to your mortgage payments.
Say you're a coffee lover (duh) but your mornings are too chaotic to make your own. So you buy a cup five times a week. At $3.50 per coffee, you're looking at $70 per month, or $840 per year. After 25 years of java to-go? You're looking at $21,000.
Now, let's see what trimming your mortgage rate by just two percentage points can do.
Say you just bought a house in Toronto for the February 2018 average price of $767,818 and a minimum 5 per cent down payment. Based on the current down payment rules (5 per cent for the first $500,000, 10 per cent for everything more than $500,000), you'd be left owing $744,677. And let's say you took the 4 per cent mortgage rate your bank offered. Over the course of a 25-year mortgage — assuming you kept renewing at the same rate — you'd have spent $430,469 in interest.
You may have two realizations right now: homeownership is expensive, and your mortgage rate really, really matters.
But what if you looked beyond your bank and find a lower mortgage rate online? By locking in at 2 per cent — instead of 4 per cent — your interest rate over the lifetime of the mortgage falls to less than half: $201,326. Makes the saving on lattes look small.
Verdict: Again, lots of money to be saved either way. But to realize the savings of the latte factor, you need to pass up on years of coffee convenience. Quite a tall order compared to shopping around for a better mortgage rate.
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Are there lots of ways to cut costs? Of course. Can cutting back on seemingly small purchases add up? Clearly. But benefitting from advice like avocado toast and the latte factor requires years of foregoing life's little pleasures, whereas being smart with things like insurance and your mortgage can save you piles of money without giving up a single thing.
So why not spend a little time on the big things, and a lot of time enjoying the small things?
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