By Steve Kautz, former Maine mathematics teacher and personal finance expert.
I love coffee. Portland is a great place to be a coffee lover. We enjoy an incredible mix of strong franchises with cheap, weak coffee, local businesses with strong, expensive coffee, and everything in between. There are coffee shops with bagels, and bagel shops with coffee. You can even find a European coffee to accompany a sweet gelato, or a coffee infused stout. All yummy.
But how does this addiction fit into or affect our finances? Over the years I have swung from spending way too much in the form of $4 lattes all the way to getting by with the cheap stuff (from a supermarket can) ‘brewed’ in an $11 plastic Mr. Coffee. Yucky.
Some well-known financial gurus talk about the coffee habit as if it will be THE reason that we are still working at age 71. While others suggest that we shouldn’t sweat the small stuff, so go out and enjoy that frothy espresso. In fact, make it a double.
Counting the Beans
I can’t tell anyone exactly what is right for their budget, but I can help with the analysis. Let’s grind the numbers.
Option #1: You are full throttle, latte city (oh, I know you are out there). Let’s assume one $4 latte, five days a week, plus one on the weekends. That is 20… um… carry the l… add back the 4… um… $l,040/year. Whoa! I threw up a little as I read that number on my calculator. I knew it would be a lot, but I admit I wasn’t thinking 4 digits.
Option #2: You have one $1 convenience store coffee a day (6 days/week) – your annual bill comes to $312.
Option #3: Mr. Coffee it is. Two cups in the morning, assume a medium-priced blend. This is not as big a savings as you may think as even the cheaper coffees are running $7 pound (the prices might not seem much higher by the can, but take note, some brands now come in smaller packages). You may have to include the cost of sugar and cream, and you’ll probably wear out a cheaper machine every year. Approximate annual cost (figuring about 40 cents a day plus a coffee pot) – $140.
I ran into a similar analysis at Yahoo Finance. It’s a couple of years old, and prices have gone up, but you’ll get the idea. Just click on the cup to take a look.
Triple-Shot, Double Hazelnut, No Whip – Charge it to the Underhills (.5 bonus if you get the reference)
What do these numbers mean? It comes back to our old economic friends, trade-off and opportunity cost (everything comes down to that, right?). Take any of the figures in these situations and imagine what you could be doing with that money. You can also imagine what you could have done with the money. That might reveal a painful set of numbers for some of us, but maybe that pain could help brew a tasty cup of new habits. Back to our options: let’s look at the difference between #1 and #2 – that is $728/year, or about $60/month. If you were to invest the $60 each month for 10 years (let’s use 5% – more risk than banks or bonds, but a conservative return from a mutual fund), how much would you have in 30 years? By the way, I’m in the “what could have been” category as I spent a few too many years living closer to Option #1. I’ve done this analysis before and it always makes me a little sick at my stomach.
It’s around 50 grand. Right, $50,000. Ugh, I threw up a little more.
Opportunity Cost: 1, My Bank Account: 0. But I Still Love Coffee.
I hope I struck a nerve, but I am not suggesting that there is a catch-all recommendation here, namely that everyone needs to give up their coffee. The point is that when it comes to managing our finances, we should take the time to analyze our expenses from an opportunity cost perspective. This can be done for coffee, wine, movies, gas, restaurants, etc. It’s very important to periodically review every item in your budget in this way. It’s easy to caught in the trap of thinking, “Well, it’s just $1.50 here and there,” without looking at the costs on an annual basis and realizing what you could be doing with money. It took me way too long to really face the numbers. I’ve arrived somewhere between options 2 and 3 (with an occasional hot chocolate thrown in), and I am happy with my current trade-off, but I regret not discovering this idea earlier in my life. By the time I do retire it will have cost me literally the cost of opening my own coffee shop.
If you are financially secure, great. Please go out and spend $1,000/year on coffee. Buy me some, too. Stimulate the economy! But, maybe you know someone who needs help getting their financial priorities straight, you can make a difference.
If you are looking to make a change in your own life, get started now. Go to your bank, broker, an online broker perhaps, and start an auto-invest program (into say, a Roth IRA) using the money you save by changing your coffee routine. Is $60/month too little? No! In fact, you will probably be excited to see the money grow and a little proud for taking the step. Or, if your company offers a retirement plan, take $25 from your monthly coffee fund and throw it in your 401k, which is matched by your employer. Now, you are putting away $50/month! If you are 30 years old, this move, continued for 10 years, will net you about $70,000 by the time you are 60 years old.
One More Thing to Check
Let’s see… If I keep Netflix, at $8/month for my whole life (in case there is ever another show as good as Breaking Bad), that comes to…
The views, information, or opinions expressed in this blog are solely those of the author and do not necessarily represent or reflect those of the Maine Jumpstart Coalition for Personal Financial Literacy.