I’m a committed coffee drinker.
I started drinking coffee regularly in my late teens and haven’t stopped.
I have a cup of French Roast every morning. I usually make it myself at home, but once in a while I’ll hit a Starbucks near my work.
I sometimes like to venture to this little indie coffee shop close to where we live to try whatever new bean or blend they have on offer.
Despite my love for coffee and caffeine addiction, I would agree 100% that coffee is a want, not a need. It’s definitely one of the things I could stop buying to save money.
But that doesn’t mean buying coffee is a waste of money.
Experts Say Buying Coffee Is a Waste of Money
Some personal finance experts like to point to lattes as the sort of wasteful spending that prevents the average person from becoming wealthy.
One financial guru, David Bach, wrote an entire book about it called The Latte Factor. In building his personal brand, he got a lot of mileage out of the idea that buying coffee is a waste of money. He even has a Latte Factor calculator on his website to show you how much money you could save if you stopped spending on coffee, cigarettes, and other little unnecessary expenses.
Another case in point, Australian property developer Tim Gurner took a shot at the millennial generation on 60 Minutes Australia. When asked if he thought young people might never own a home in Australia, one of the most expensive housing markets in the world, Gurner said: “Absolutely when you’re spending $40 a day on smashed avocado and coffees.”
Personal finance celebrity Suze Orman has the sassiest quote I’ve heard on the matter. Suze Orman on buying coffee: “You are peeing $1 million down the drain as you are drinking that coffee.”
That’s a fantastic sound bite. I’m sure that quote resulted in a few extra book sales. But is it true?
Can you really become a millionaire or buy a home in a pricey real estate market by simply skipping coffee or avocado toast? All of these uber rich financial experts are saying it. It must be true, right?
While small expenses certainly do add up over time, saving $1 million by skipping coffee is not accurate. Under real-world conditions, the math just doesn’t work.
A grande latte at Starbucks costs me $3.91 with tax. If I buy one every day (pretending that I go to Starbucks on Christmas, Thanksgiving, Mother’s Day, and when we’re camping in the middle of nowhere) that works out to $1,427.15 per year. That’s actually more than Suze’s example in the video clip as she used a nice round figure of $100 per month or $1,200 per year on coffee.
Let’s say instead of spending roughly $120 on fancy coffee every month, I do this instead:
- Invest $120 per month in a balanced index fund
- Earn an 8% annual return for the next 40 years, reasonable for a balanced portfolio.
- Pay 15% in taxes on my investment annually
- Feel the effects of inflation, which averages out to 3% for the term
When we plug those numbers into the AARP investment return calculator, we see that given those conditions, my pee money only comes to $87,268 after 40 years.
That’s nowhere near a million dollars. It’s not enough to get me an ocean view in Sydney.
Barking “It will take you 40 years to pee $87,268 down the drain” into a TV camera isn’t sexy. It isn’t scary or particularly eye-opening. It wouldn’t sell books.
But it would be realistic.
Even if I could ride my unicorn past the Starbucks in Fantasyland, where taxes and inflation don’t exist, with an 8 percent return I’m still only looking at $391,623 in 40 years. Closer to $1 million, but not really.
To match Suze’s number, I need a 12 percent average annual return, no taxes, and no inflation.
I could throw my coffee money in a Roth IRA to cover the tax part, which Suze does suggest. The 12 percent annual return and zero inflation rate are going to be challenging if I’m going to trade lattes for a million bucks.
A 12 percent annual return means I would have to outpace the historical average return rate of the S&P 500 index, which hovers around 10 percent. You can verify that with this nifty compound annualized growth rate calculator for the S&P 500.
Unfortunately, I’m not a talented stock picker like Warren Buffett. I’ve never had a high tolerance for risk, meaning I won’t stick 100% of my retirement savings in a stock fund. I imagine I’ll be even more risk averse as I grow older.
That makes the whole 12 percent thing a little more difficult. I’m satisfied with a market return, but that doesn’t really help the lattes are bad argument.
Then there’s the fact that I would like to buy stuff in my old age. But I’m going to lose 2 to 3 percent of my purchasing power per year thanks to inflation. $87,000 in 2060 won’t even resemble $87,000 in 2020 dollars.
It’s clear I must try something other than making coffee at home, toasting my own bread, and smashing avocados myself. I usually do these things anyway since the lovely Sara and I live a mostly frugal lifestyle.
But I know also that being frugal alone won’t fund my retirement. I know I won’t be able to purchase beachfront property anywhere in New South Wales solely because I work out at home instead of paying for a gym membership.
Instead of letting the judgy coffee shamers get to me those times when I go out for breakfast, I’ll look for ways to cut down on the major expenses like housing, transportation, debt, and insurance. Perhaps I’ll ask for a raise or continue trying to increase my income on the side with the in-demand skills I’ve developed over the years. I’ll make maximizing and automating my retirement savings a priority.
If I do all that, I can order extra cheese on my Whopper guilt free.
So if cutting out the lattes and skipping avocado toast won’t make you rich…
Is Buying Coffee and Avocado Toast Making You Poor?
Probably not. Yes, wasteful spending on wants can lead to bankruptcy. But so can a lack of employment opportunities, student loan debt, and necessary medical treatments.
Buying your breakfast and lunch out five days a week then not having enough money to pay your electric bill is bad. Spending more money on coffee than you put in your retirement fund is not a financially sound idea.
And that’s really the point.
If you look at the whole “buying coffee is making you poor” argument as a metaphor for not knowing where your money goes, not practicing good money habits, and neglecting your savings, then it does make some sense. Even if it’s poorly stated and mathematically questionable at best.
You can ignore the outrageous claim that giving up coffee will make you a millionaire. It won’t.
Saving money by not buying coffee is reasonable. Buying a coffee or the latest trendy breakfast food is fine too. If you can afford it, you’re not neglecting your savings, and it makes you happy, go ahead.
Jerry is a personal finance enthusiast, side hustler, and freelance web developer who began his career in financial services. He co-founded KindaFrugal.com, a personal finance and frugal living blog. His insights have appeared on MSN, Newsweek.com, HerCampus.com, Mashed.com, and many others.