The cost of a cup of coffee is relatively small in the grand scheme of things – the average cup costs just $2 or $3.
Though, the idea of saving money by ditching your daily coffee habit seems to be gaining some momentum. David Back recently published a book titled, “The Latte Factor” and Suze Orman is vowing to never buy coffee from a coffee shop. Ever.
This idea has been around for quite some time – stop spending $3 a day and you’ll save over a $1,000 a year. And if you invest that money it’ll grow even more!
And while I think trying to save some extra money every day is a great idea, I’m not entirely sure why coffee gets such a bad rap.
Below, I’ll question if the cost of a cup of coffee is really costing you…
The Math Behind the Cost of a Cup of Coffee
Alright, I’m going to pick on this Suze Orman video for a second (or a few minutes) because the math is so atrocious.
Let me say that again – the math is nuts. It doesn’t make sense. It’s almost not even math.
Take 1 minute of your time and watch this video below before I really dive into my rant.
Link to the full article with video embedded here.
Alright now here is everything wrong with it… (we’ll circle back around to what is right with it later).
1. The Monthly Cost
First off, the range that is provided for the average cost of a cup of coffee is actually pretty accurate: $1-$3. If anything, it’s a little low. Everything that I have seen has been in the $2-$3 range.
But even if you take the high range given in the video ($3), in no way does it add up to coffee costing you $100 a month. Which is the number Suze conveniently rounded to.
The $1-$3 range would equate to a monthly cost of $28 at a minimum and $93 at the maximum. So why did we jump to $100 a month?
You could make the argument that maybe they were adding taxes on, but I don’t know… seems like they were just pushing to get to a round number instead of giving an honest number.
Speaking of honest numbers…
2. 12% returns per year?!?!
Note the small, but extremely important asterisk at the top of the screen in the video (it pops up around 26 seconds into the video):
“*At a 12% Annual Rate of Return”
Sure a 12% return gets you to $1 million at the end of 40 years, but where the hell is 12% coming from? The average investor certainly does not make 12% per year. And if someone promises you 12% per year returns, I’d be very skeptical.
If it’s too good to be true, it probably is.
3. You are still buying coffee to make at home…
Last but not least, someone giving up their daily coffee purchase is likely making it at home instead. Unless Suze is suggesting that all of America just stopping drinking coffee all together.
Making coffee at home is not free, last time I checked.
If you assume it cost $0.50 for a cup of coffee at home, that takes away from the $1-$3 of savings. Even if you assume it costs just $0.25 to make coffee at home every day, that is still something that needs to be considered.
So, with my math (what I will call, “real math”), the actual value of giving up your cup of coffee would be $200,000.
These are the assumptions I made to get there:
- $3 cup of coffee per day is saved (the high end of Suze’s range).
- 7% annual returns (a much more realistic average of the S&P 500).
- $0.25 cost of making coffee at home (so your net savings is not $2.75, not $3).
Again folks, that is $200,000 in savings, not $1 million. It’s still a lot of money, don’t get me wrong, but I don’t want anyone walking around thinking their daily coffee habit is costing 5 times more than reality.
Now, bringing it back to the positives…
The idea behind the video at it’s very core is good – save more money by thinking twice about every day purchases. But the hard stance this video takes against coffee makes no sense to me. Math aside, the video also does not take into account the principle of…
…Value. The principle of value.
Merriam Webster has a definition for value that I think is fitting, “the relative worth, utility, or importance.”
The key word in this definition for me is relative, because value depends on who you are asking. One person might value a cup of coffee very highly. While another person might not value it at all.
I am not an economics professor. Far from it actually, but here is my basic understanding of the situation with a few examples:
- Example 1: If someone values a $3 cup of coffee at $10, then they buy it. Great deal!
- Example 2: If someone values a $3 cup of coffee at $4, then they buy it. Good deal.
- Example 3: If someone values a $3 cup of coffee at $1, then they don’t buy it. No deal!
Though, the issue is that someone who values the cup of coffee over the price (examples 1-2) might not be able to actually afford it. There might be a lot of items that they value more than its price, and they have to make a decision on whether or not to buy it. So tradeoffs come into play.
Imagine a scenario where someone has only $3 to spend, and they can get either a $3 beer or a $3 cup of coffee. This person values a beer at $5 and a cup of coffee at $10. Both would be a good deal, but with their limited resources they choose the coffee because it provides more value to them.
Now scale that up to a more complex version of your life. Every day you have to make decisions about what you can afford and what brings you the most value. It’s not as easy as the finite decision above.
The key is to just be thinking through the value of your purchases on a semi-regular basis. You don’t want to be mindlessly spending money on coffee every morning if it does not provide enough value to you. But that applies to more than just the cost of your cup of coffee. It should apply to everything.
The Value of Investing
And once you start measuring the tradeoff between a purchase you can make today and what that money would be worth to you if invested, that is when you can really start to ramp up your savings mindset. Because every dollar saved today is worth even more in the future.
Here is another quick example to bring this to life:
- Let’s say you value the $3 cup of coffee at $5.
- But if invested, that $3 will turn into $6 in 10 years.
Now the question is, would you rather have that $5 value right now (the coffee) or that $6 value in 10 years (investing)?
Not an easy question to answer, and not necessarily one you should be pestering yourself with on a daily basis. But it is a question you should be thinking about occasionally and definitely with big purchases.
Why is Everyone Picking on the Cost of a Cup of Coffee?
Understanding the simple concept of value, I’m not sure why everyone takes a hard stance on coffee. Why didn’t a different, random $2 or $3 item a day get the focus?
Like beer. Or granola bars. Or tea.
I get it a little – coffee is ubiquitous and is an easy target. But if you really value your daily coffee and it brings you a ton of joy, then don’t give it up.
Instead, find the small areas where you are spending money on things that do not bring you as much value. You don’t have to cut out coffee just because it’s the random scapegoat for personal finance “experts” in America this week.
Or, skip the small stuff all together and focus on bigger ticket items.
Focus on Budgeting the Big 3
The big 3 of budgeting include:
These are the areas where most people spend the most money, and therefore have the most room to save money.
Here is how you can save money in each of these big ticket items…
Most budgeting advice recommends you spend most of your income on housing. Sometimes even spending as much as 35% of your income!
Houses and places to live are big and expensive, but assigning a fixed portion of your income to them does not make a lot of sense.
Depending on where you live and how much money you make, it may be necessary to spend 35% or more. But others may be in a position to spend much less.
There is no need to buy a bigger house or rent a nicer apartment just because you can. By saving $25, $50 or even $100 a month on your rent/mortgage, you are creating a huge amount of reoccurring savings that you can invest every month.
The biggest mistake most people make in the transportation category is buying a fancy, new car.
A car for some people is a need. Anything more than an old, affordable, used car is a want. If you want to save money, buy something that gets you from point A to point B safely and for a reasonable price.
If you want to save even further, ditch the car all together and opt for public transportation.
And if you want to take it one step further than that, just get a bike! You can ride a bike in the winter if you are determined enough…
I know, some people really value their cars. If that’s the case, don’t ditch it. Go buy (or keep) a fancy, new car. Just don’t complain about not making end’s meet at the same time.
Last but not least, cutting your food budget is a great way to save money. I’m not talking your daily coffee or once a week burrito, but your overall eating habits.
Eating out is expensive. Eating in is relatively cheap.
If you can shift your habits to eat in more than you eat out then you will reap huge savings.
And there is a ton of great advice out there on how to eat in on a budget.
Cutting spending out of your life is much easier said than done. It is simply not possible for everyone to be able to pay less for housing. Or to ride a bike everywhere. Or to cook for themselves and family every day.
Some people are already cutting down to the absolute minimum. And in that case the only option is not to save more, but to make more.
An Alternative to Cutting Expenses: Increasing Income
Just Start investing does not focus a ton on increasing income on this site, but it is a great option to turn to if you are looking to save more money.
In fact, it’s probably the best option. There is not ceiling to how much extra money you can make, but there is a floor to much more you can cut from your budget.
Here are some great resources to check out to help you increase your income:
- Tips on How to Increase Your Salary and Get the Raise You Deserve
- 7 Ways to Make Money Outside of Your Full Time Job
- 19 Ideas on How to Make Extra Money
- 5 Ways to Increase Your Salary that Anyone Can Do
- How to Navigate an Early Career Job Change
Oh, and of course, cutting money just to cut money is no fun. And working just to work is also no fun.
Sometimes, there is no need to save more than you are (what a great situation to be in!). Learn how much you actually need to save here, and see if you need to be saving or earning more to get on the right track.
And… if you need to start from scratch and build a new budget, you can get more details on how to build the right budget here.
Just Start Investing is a personal finance website that makes investing easy. Learn the simple strategies to start investing today, as well as ways to optimize your credit cards, banking, and budget. Just Start Investing has been featured on Business Insider, Forbes, and US News & World Report, among other major publications for its easy-to-follow writing.
I drink the free coffee at work. I do, however, buy coffee on weekends.
Just Start Investing says
Nothing wrong with that!
Chris Roane says
I loved how you framed this article. I agree, that I think the coffee question is usually overblown. People will stretch themselves in saving $3 on a coffee, and yet live in a house that takes up 50% of their take-home pay. The coffee purchase is not the core problem there. I liked how you framed the value discussion.
We are finally at a spot where we are consumer debt free and can start investing, and are really thinking about the value of our purchases. This has caused us to increase certain budget categories…some by drastic amounts. Our we giving up future investment gains? Probably. But we also realize if we cut too much, we probably won’t stick to the plan and abandon ship. Life needs to be enjoyable. So it requires thought and balance. Thanks for sharing!
Just Start Investing says
No doubt! I’m actually thinking about writing a post on “the benefits of lifestyle creep”, which I think you nailed in this comment. As you accomplish goals (like getting debt free – congrats!), nothing wrong with increasing both your spending and savings rates!
Mr. SR @ SemiRetirePlan.com says
Very interesting, fair analysis! I feel like my grandpa saying something like this, but “The coffee isn’t about the coffee.” I think you captured the point well — the coffee cost vs investment exercise is all about just being aware of the opportunity cost!
It’s hard to find the balance between investing for the future and enjoying the present, but it’s certainly a helpful first step for us all to be aware of the upside of consistent investment, even on the scale of just a few dollars each day.
Just Start Investing says
You got it! Being somewhat mindful in your spending and you’ll be better off for it!
Very creative information. Thank you for share with us.