Been reading much about personal finance lately? Well, there’s an extremely divisive argument being made about your coffee habits and retirement. It’s known as the “latte factor”.
The “latte factor” states,”Cutting out your daily coffee will give you enough money to retire with!”
Some people swear by it, others think it’s the most preposterous retirement strategy ever. But can you really retire by cutting coffee from your morning routine?
Let’s Be Real, Probably Not
Simply skipping your Cup of Joe each morning will not be your end-all way to wealth. Get over it Suze Orman! It’s just not that simple for most of us, life and retirement is damn expensive. Unfortunately, the average-American is ill-prepared for it.
However, skipping the latte could net you an extra $345,000 in retirement. And that my friends, is no chump-change.
But before you get too excited about all that money, let me bring you back to Earth! Because we live in the real world, inflation and taxes must be taken into account for any future investment returns.
The Math and Power of Compound Interest
Estimate your average Starbucks drink cost at $3. Regular coffee will actually be less, but a lot of their drinks exceed this, so $3 is the middle ground.
Saving $3 each day of the month will give you $91.25 to invest each month.
Plug $91.25 compounded monthly for 40 years into Calculator Soup’s Compound Interest Calculator and watch the magic happen.
What should you use as an estimated rate or return?
8% is a good number because it represents a conservative value that the S&P 500 has achieved over the course of its 60+ years. Remember, we are investing long-term, you will have ups and downs throughout the years, but the main investment strategy is to stay the course!
The S&P 500 is a weighted stock index made up of 500 of the largest publicly-traded US companies.
Why use the S&P 500 average returns?
The reliability of proven gains and its ease of investing are good enough reasons for me.
What should you use as an estimated inflation rate?
3% inflation is a good guess for your calculator value.
Inflation is a measure of how the price of a service or commodity goes up over a period of time. The higher the inflation rate, the less buying power your money has.
Think of it this way. One dollar 50 years ago was able to pay for a hell of a lot more than one dollar can today.
The average inflation rate over the past 40 years has been approximately 3%.
After 40 years of depriving yourself of caffeine, you will have about $345,000 in the bank if your investments make an average of 8%. Not bad at all.
We need to remember though that $345k in the future is not going to have as much buying power as it does today. How much less buying power exactly?
In 40 years $345,000 will be the equivalent of having $97,000 in today’s money. Retiring by cutting coffee is starting to not look as lucrative.
You will also owe taxes on the money you have made. Most likely these will be long-term capital gains tax based on your income in retirement. 15% taxes on your money is a good estimate.
$82,000 is what you will be left with!
Now, I am not saying $82k is nothing to be proud of, but its a far cry from the hyped-up $345,000.
Are We Missing the Point?
The point of this post is not to convince you to stop drinking coffee. By all means, DO NOT do that! Our economy is fragile and something that drastic could put the world in economic turmoil. Just kidding!
I simply want to make you aware of how a change in any small routine can pay huge dividends in retirement. Your retirement savings should not be relied upon from one source. Diversifying income streams is a great way to create a strong retirement portfolio.
Coffee is often used in this retirement example because it’s such a relatable item. Unfortunately, people fixate so much on their precious caffeinated-beverage that the lesson is lost.
PEOPLE, stop thinking it has to be your COFFEE!!! The latte factor can be applied with any small amount of savings.
I challenge you to find some way to save or earn approximately $3 per day or $91.25 per month and you too can be on your way to an extra $345,000 in your retirement. But don’t stop there!
Once you find one way to get ahead, it’s time to start looking for your next move. The small dollar amounts will start to snowball into serious money-making forces.
Small savings compounded over long periods hold real power. Take the Acorns App for example, which invests fractional dollar spare change round-ups to build savings and retirement portfolios.
These types of micro-investing apps are available because they work! Our financial goals should not require us to live a miserable existence. There are plenty of ways to get ahead without completely axing the things you love.
Side Hustles to Make You Extra Cash
So you want the retirement savings, but not at the cost of your beloved coffee? I’m a millennial so I get it, we want it both ways. This is why I can’t take the “latte factor” seriously.
If you crave your morning trip to Starbucks and it makes you happy, be my guest and indulge!
Instead, try these Easy Side Hustles to Make You Extra Cash.
- Acorns App: Invest money by making everyday purchases. It’s simple and works!
- Survey Sites: If you have time to kill, why not make a few bucks answering questions.
- Postmates: Recently bought by Uber, make money delivering goods and food by car, bike, or foot.
- DoorDash: Similar to Postmates, deliver food in your area.
- Dosh: Use the App to get cash-back by simply shopping and dining.
- InstaCart: Deliver groceries, get paid, and tipped.
Side hustles like the ones listed above aren’t going to allow you to quit your day job. They simply provide you that little extra income. A little more in the pocket never hurts to have. And if you remember back to the power of compound interest, these small amounts start to add up.
Another Option: Brew at Home Alternative
If you are anything like me, cutting coffee from your routine is just not feasible. But local coffee shop prices are steep and start to add up.
The average drink at Starbucks ranges from $2 to $6. For the average coffee drinker, let us make the assumption of $3 per daily visit. $3 per day brings you a total cost of $1095 for the year.
Let’s compare if we made our coffee at home.
Buying whole-bean or ground coffee by the pound allows you to brew at home for an estimated 30 cents per cup. Do the math to give you a savings of $2.70 per day.
$2.70 per day gives you a total of $985.50 savings on the year. Over 40 years, that’s $39,420! Not too bad by simply making your brew at home.
Once again, plug the savings into Calculator Soup’s Compound Interest Calculator. Use $986 annually or $81 in monthly savings for 40 years with an 8% return. $307,000!!!
When I brew at home, Folgers and a Mr. Coffee pot simply doesn’t cut it. Invest in some quality equipment that will make your at-home-brew just as enjoyable as the coffee shop. With your savings, don’t feel guilty about purchasing the set-up you want.
I use a highly-rated Bonavita BV1900TS coffee maker to brew a great-tasting cup. Pair it with a Cuisinart DBM-8 Supreme Grind burr grinder and Breville Milk Frother. You won’t even miss Starbucks one bit!
Enough about coffee lets get back to the dollars and cents of it all.
Act on Your Savings
Saving money each month will not get you the $345k+ type money you are looking for.
Unfortunately, it does not just appear in your account because you are a savvy-saver. You must act on your savings and religiously invest and invest some more.
However, too many of us(including myself) put off the investing part of the plan. Simply saving the money will only get you a fraction of the way there.
Open a Retirement or Brokerage account to let your money start working for you.
Disclaimer: Stock market returns are not guaranteed. Stock prices go up and stock prices go down. Fortunately, history is on our side with positive stock market returns to help us grow our net worth.
Many Ways to Get There, Just Start
Life is all about choices. Some are worth the sacrifice and some are not. You are in the driver’s seat with total control.
Coffee may not be the area where you are willing to make sacrifices and that’s perfectly okay.
Find a different avenue where you are comfortable saving or making extra money. And then put those dollars to work by investing.
Find out how I used simple finance fundamentals to Become A Millennial Millionaire in My 30s.