The Latte Effect: Helping students achieve financial freedom
Would you believe me if I told you that you can turn a coffee into £58,000 by the end of this article?
What can students do to improve their chances of becoming financially independent using the tools available to them right now? I asked Clinton Askew, the director and founder of Citywide Financial Partners, a wealth management firm based in Surrey, UK, and he had the following to say.
After asking Clinton what the most important tool available to students is, he responded that the most effective implement is a budget. Organisational saving ahead of time ensures that students can meet their needs with a proper allocation of their money, whilst preparing for their future by placing cash into savings vehicles.
Clinton emphasised an essential element of a budget is learning the ability to ‘save first and spend second’. This ensures that, before any unnecessary expenses, you place your amount of predetermined cash into savings accounts and pay your dues, such as bills or subscriptions.
The financial advisor also recommended employing a ‘Zero-Based Budget’ where all expenses from your account are carefully analysed to see if they’re justifiable. The implementation of this requires you ending the month with zero in your account, and that’s not to say that you’ve run out of money but that all of it has been appropriately allocated towards expenses and savings. Any excess left over should be transferred into a ‘Rainy Day Fund’ (an account with 3-6 months living expenses) for emergencies.
Clinton also asserted the importance of starting your financial journey as early as possible, as increasing your awareness of your own income and expenditure is likely to put you in a better financial position both now, and later in life.
In order to maximise your savings potential in the coming years, Clinton advised being aware of the ‘Rule of 70’. In essence, you take the interest rate that your money makes in a year and divide 70 by that amount, which gives you the number of years your money will take to double in value.
Say at age 20 you invested £10,000 into an account with a 10% interest rate, using the rule, that would mean your £10,000 would turn into £20,000 in 7 years. Compounding this over the course of a lifetime and that £10,000 could turn into £320,000 by the time you’re 55 and then £640,000 by the time you’re 62!
Whether you have a savings ISA or a stocks & shares account, this rule applies to all amounts of cash that accrue interest over time.
Now, you might say “I’m a student, I don’t have that amount of money available to me.” This is where that gift I spoke about comes along. Clinton highlighted the absolute importance of being aware of ‘The Latte Effect’ and that using it to your advantage could mean having the ability to make tens of thousands of pounds with very little required other than self-restraint.
Think back to university life before Covid-19 and all the times during the week where you’d go to grab a coffee or a sandwich during your lunch break at the library. For convenience sake, let’s say that all these purchases together amount to an average of £25 per week over the course of the year, leading to an expenditure of £3,900, by the end of your 3-year degree; all that just spent on coffee and sandwiches.
If you took that amount and invested it instead over 40 years, you would have £58,400 by the end of it (assuming a return of 7% p.a.). Now ask yourself, are you willing to throw away that amount of money in exchange for a few drinks and snacks during the week or can you use this gift to financially better yourself and secure a more stable future?