Indulge me for a second. Imagine, you are in need of a nice warm cup of coffee before starting a long workday. Like rhythmic clockwork, you frequent your favorite coffee shop. Perhaps it’s your favorite Star Bucks shop or a locally sourced coffee house. Either way, you are on a mission to obtain your long-awaited daily injection of caffeine.
After a bit of waiting it is time to order. The barista smile and greets you like the loyal customer you are. Taking no time to order; you choose to ignore the $5 charge. Left to wait for your order, you check your social network feeds and update yourself with the formulated feeds of your friends and family. Finally, Out of the corner of your ear, you hear your name called. At last! You think as your head perks up. You make your way to the side counter and grab your long-awaited cup of coffee. After thanking the barista, you take a sip of that sweet nectar, and go about your day.
Now tell me, what is wrong with this picture? Besides the added stress your caffeine addiction will place on your body, what’s the real crime in this story? Might it be the added stress on your wallet? Ask yourself, how many times do you find yourself saying “ Well geez… I sure wish I didn’t have all these bills to pay” only for irony to build as you sip on your expensive $5 coffee. Let us dive a bit deeper into the story above. How much did you end up spending for a cup of coffee? In this case $5. And what did you get out of such a pricey drink? Besides a chance to charm the barista, what drives one to spend $5?
One word… convenience. People are notorious for their willingness to take the path of least resistance. Whereas the path of least resistance is ideally supposed to provide one with the safe path, one is far more likely to end up traversing a path full of financial parasites. As the saying goes, “You get what you pay for”. Well in this case, what you are getting is a financial burden rooted in caffeine dependence.
Time for a bit of fun math. Let’s assume you’re a heavy coffee consumer and you frequent your favorite establishment 5 times a week. 5 visits, buying 5 cups of coffee at $5 each, such expenditure comes out to a running cost of $25 a week. Now we multiply 25 by 52 weeks (number of weeks in a month) and we get a yearly total of… $1,300 dollars! Or to put it in perspective, a person making 14 dollars an hour will make $29,120 a year before taxes (assuming the person is working full time). Take $29,120 and subtract $1,300 of yearly coffee expense and you are left with a total of $27,820. Now take that total and divide it by $29,120 and get 0.955. Finally, take 1 and subtract 0.955 and multiply by 100 to get 4.5%.
Thus, assuming you relate to said story, you would be spending around 4.5% of your income each year on coffee. Now keep in mind, we did not account for taxes, so one should expect a higher percentage than was calculated.
So why does this matter? Why should I be judged for enjoying my morning ritual you might say. Well, ask yourself can that money be put to better use? Chances are, you will say yes. Let’s look at the market to find out!
Ok, say instead of spending that $1,300 on coffee, you decided to be more thoughtful with your money and invested it all in the market. Now the numbers I’m about to use are all relative. However, they are close to the numbers I use when calculating my own stock portfolio.
So, say you invested $1,300 into dividend growth stocks with an average return rate of 4.5% and an annual compound return rate of 8%, let’s see how much money we are likely to get if we played the stock. So, taking the initial lump sum of $1,300, we multiply by 4.5% and ending up with a number around $58.5. Next, take the $58.5 and add it to the initial $1300 and get a total of $1,358 (rounded).
Now we do this three more times (note dividend stocks tend to be paid out quarterly or 4 times a year) and get a sum of around $1,548. Finally, take the calculated final and multiply it by the compound return rate of 8% and get a final total of $1,671. This means if you were to put the $1,300 you would have spent on coffee into the market and let it appreciate in value for a year, you would end up with a difference of $371. Thus, you would have made $371 or around 74 extra cups of coffee!
To conclude, find your coffee pit. Identify it, and work toward finding ways to soften its financial strain. Additionally, take that money you would have spent and placed it into the market. If you’re patient, your bank account will thank you as you watch your portfolio increase in strength as it grows alongside the market.
In reality, I know not everyone is a coffee drinker. This was more to show how people are so willing to spend for day to day expenses and be blinded by the big picture. Sure that cup of coffee may taste good for an hour or so, but take a moment to think upon what you’re loosing in the long run. In simple terms, such frivolous spending on unneeded luxuries ultimately prolongs your journey to reaching financial independence. take hold of yourself and spend lavishly on your future.
The Young Investor 