I came across David Bach’s Five Ways to Save $2,500 in 20 Minutes the other day. The article hits my two major pet peeves: #X tips that will save you $Y and The 10% Compounding Myth. The first pet peeve deals with all the articles that detail so many ways to save money. I always read these tips and come out no better than I was 5 minutes ago. The second pet peeve is when a personal finance writer glosses over the concept of inflation and taxes. Usually it’s goes something like: Save $X a year for Y years, earn 10% compounding interest, and you have a million dollars.
Let’s start off with the 5 tips David Bach offers.
- Lose the premium cable television and save $960 a year. Suggestions include: not having a cable box on every TV, downgrade to basic cable at $20 a month instead of the typical $100. Unfortunately, I’ve got the minimum package for my HDTV cable box with DVR. I could skip these luxuries, but I get full use of them. I’m also looking to get around them with my plan to cut cable TV. Still, my cable costs are half of what the typical cost is.
- Get a cell phone plan with fewer minutes and save $240 a year. My cell phone plan with unlimited data and text messaging is $30 a month. I got lucky with Sprint on this on this, but it’s pretty much impossible to save any money here.
- Get rid of the landline phone and save $600 a year. I have a $15 a month Vonage plan and even that can be a problem sometimes. I tried applying for a Discover card, but they couldn’t verify my landline belonged to my address. That meant no card for me. The most I could save is $180 and I think that’s money well spent. If you’ve ever used 60 minutes of your cell phone on hold, you’d understand why I like to have a landline.
- Get rid of the premium gym membership and save $240. I ditched my gym member for the one in my complex, but even when I did have a gym membership, I had the cheapest one around. I don’t know anyone who has ever had a premium one. Do people really have these?
- Shop for car insurance and save $500. It’s a great idea in theory, but Massachusetts car insurance is standardized. Most companies won’t even offer it, let alone have different prices.
The projected grand total savings – $2,540. My grand total savings: $0.
What does that savings buy you? According to David Bach:
In 20 years, investing $2,500 a year with an 8 percent interest rate will amount to almost $125,000. In 30 years, you’ll have accumulated over $300,000, and in 40 years, almost $700,000. Earn a higher interest rate — say 10 percent — and in 40 years you would have well over a million dollars.
Let’s look at the math in more detail. We’ll take the 40 year and 10% case… It turns out that after taxes, that 10% interest rate that you were getting is probably closer to 8% (if you are really good about the taxes). After 3.75% yearly inflation that 8% is closer to 4.25%. Adding in all those expenses (we won’t even count investing expenses) and instead of “well over a million dollars”, you’d have the equivalent of $262,769.50 in today’s dollars. That’s nothing to sneeze at, but the changes won’t give you the buying power of a millionaire as implied.
Mr. Bach’s heart might be in the right place (and sure it sells more books), but it doesn’t seem the math is.