Every personal finance blogger at one point or another has to write an article about how, “The money you spend on coffee every morning could make you rich,” or, “brown-bagging your lunch every single day will save you so much money.”
The truth is that these articles aren’t lying. Basic math tells us that if you buy coffee every morning, that toonie (if you’re a Tim Horton’s person) or, five-dollar bill if you’re a Starbucks ‘elitist’ will cost you $700-$2,000 per year. Assuming that our caffeine addicted society couldn’t simply quit drinking coffee altogether, let’s say most would still spend $100 brewing cheap coffee at home. That savings will amount to over $700,000 assuming a 10% rate of return over 40 years and a $1,500-a-year cost. This is a fairly noteworthy amount of money for most individuals that I know. Some people might claim that this amount isn’t adjusted for inflation, but my counter would be that the coffee prices would also be subject to inflation over the same time, so the $700,000 in current-day-value is a worthy estimate.
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Cheap Coffee Keeps the Accountant Away?
I actually make the coffee at work for social reasons and so I guess I subscribe to this classic frugal tip (without really trying); however, I know that it is almost an unchangeable aspect of post-secondary culture to spend way too much money on status-specific cups of coffee. More so than the money I could save, the principle of paying so much in order to achieve a certain status through coffee is what stopped me. Plus, I just don’t have a distinguished enough palate to really notice a difference between the $5 “Super-Grande-Mocha-Frappa-Double-Tripple-Expresso-Caffeine-a-licious-Whipped/Frothed-Special,” and a cup of no-name cheap coffee with a dash of cream and a cube of sugar.
How Many Lunches Does $150,000 Buy?
The brown bag lunch conundrum often gets me. At work I have access to pretty cheap lunches. Usually I can purchase my whole lunch for $6-$7. This is a double-edged sword because I often use this cheap price to rationalize not brining a lunch. I try to limit it to once a week, but realistically it become a 2-3 times a week thing. I just hate the chore of making my own lunch in the morning or evening more than anything else. This probably costs me about $300 bucks a year (assuming I buy lunch 60-70 school days a year) above what it would cost to brown bag it anyway. Using the same calculations as before this habit will cost be about $146,000 over my life in current-dollars. I’m willing to live with that most mornings that I decide it just isn’t worth it!
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“I Might As Well Light The Money On Fire!”
For me, the most obvious example of how a ‘luxury’ substance can eat away at your saving rate is smoking. Even if you choose a discount brand, you are still looking at paying at least 11 dollars-per-pack at most places in Canada. For a pack-a-day smoker (I think this is still roughly the average) you are looking at astounding $4000 per year to sustain your habit. That in itself is pretty sobering, but when you consider the lifetime costs (assuming you start at 18 and stop at 60, and invest at 10%) it rounds off to about $2,365,000 assuming the same return on investment as before. Yes, you read that correctly, over 2 Million dollars! Of course few people would have the discipline to put that $11 per day in an investment account instead of in the pockets of big tobacco, but the figure is shocking all the same. I often use this calculation with my high school students to show why they shouldn’t smoke. The sound of 2 million dollars usually has much more of an effect than the classic ‘one day you might get cancer’ line does when the audience is full of the invulnerability of youth.
Some Things Are Just Worth It
What it really comes down to when considering luxuries is simply making an informed decision about what you would rather have. For me, I am fine with the fact that the occasional cafeteria-purchased lunch will set me back a little over the course of my lifetime. Some people would rather travel extensively in their youth, or own that brand new car (Related: How I Decided To Buy A New Car), and consequently add another 5 years to their work life. As long as you are aware of what those little luxuries truly cost you in the long run, and the power of compound interest, then you can spend and save your money guilt free.
My opinion is to save at least 10% of your net pay, then have the coffe if you want and can afford it. Why deprive yourself to get rich? Instead, Pay Yourself First and then enjoy your life and/or coffe.
As for the cigarettes, that’s a diffferent matter. I watched both my Dad and Grandpa get emphysema. Walking around with an oxygen bottle isn’t living. My uncle lost his larynx and had to talk through a hole. Then, he died of lung cancer a couple of years later. The money is the smallest part of the sacrifice.
I definitely agree on the smoking aspect. My mother is a smoker and I worry about her every day. I also agree that money is the smallest part of the sacrifice, however I find that it is a disproportional incentive to prevent people from smoking. So I describe it that way.
I like your idea of 10% and I actually subscribe to a similar theory, however the viewpoint that says you could make just as good a cup of coffee at home for a tenth of the price has a legitimate point!
I’ve figured out the whole coffee thing, if I do say so myself: give up buying coffee from shops and instead buy it in bulk in the form of green beans. By roasting these beans oneself (it’s done in a wok or popcorn maker) you get the highest quality (read: fresh), cheapest coffee – more for less, now that’s money management.
Actually, I have only just stumbled onto this but by the time I run out of my current supply of coffee I’ll be implementing my plan. I’m not so young but it should be good for $350,000 anyway.
Very interesting method. If you are interested in shipping a free bag of beans, I would be interested in doing a feature column on you!