First The Latte Factor, Now The Coffee Factor

Recently a short video from Suze Orman created a bit of a controversy on social media.  Granted everything is a controversy on social media these days, but I found this one particularly interesting.

Orman recorded a short video called “how your daily coffee habit is costing you $1,000,000”.  Not too click-baity, right?  In her uniquely overconfident and in-your-face way she claimed that if you have a daily habit of purchasing coffee (not a latte), you are forgoing $1 million in 40 years.

I try to avoid social media and minimize my time on all of it as much as possible.  But in the 30 seconds I took to glance at the comments, I was assured that 33-alarm dumpster fires are alive and well on social media.

But let’s look at her argument, its flaws, and run some real, “non-fake-news” numbers.

Firstly, she doesn’t differentiate between purchasing a cup of coffee each day, presumably at a Starbucks or other coffee shop as her video shows, and simply making your coffee each day at home.  So some of the outrage was along the lines of “hell no I’m not giving up my daily coffee!!!”. 

Suze seemed to be saying “stop having you’re daily coffee all together”.  What she should have said was “coffee is great and making it at home is far far cheaper than buying it each day at a coffee shop, let’s run a comparison”. 

So her analysis pretends you stop drinking coffee all together.  Yes, I would join the camp of “that just ain’t gonna happen.”

But the big hulking problem with Suze’s lecture is that she claims you can get 12% annually over 40 years in a Roth IRA.  Uh…. yeaaahh.

Perhaps she and Dave Ramsey have been colluding err, hanging out.  After all they’re both masters of self promotion and marketing. 

So let’s break this down with real numbers that are more honest and far more realistic.

 

The Daily Coffee Factor

In general, you can make coffee at home for 15 to 30 cents a cup depending on what you buy and how you run the numbers.  You’ll see analysis below that and above that, but I’ll split those numbers and use 22 cents a cup for my analysis.  I used a mid-level cost of ground coffee at $7 a pound.  Not the cheapest by far but also not the ridiculously priced Starbucks crap.

If you’re a coffee snob and are now screaming “no way I only drink (insert your overpriced coffee brand here)“, then this analysis isn’t going to be for you.  Sorry.  Additionally if you have a Keurig you not only paid tons of money for the machine but you’ve doomed yourself to overpay for coffee anyway, and you might as well just buy it at a shop.

Let’s assume you drink one cup a day every work day for a year and you work 5 days a week.  Also let’s assume you get three weeks off like many Americans do which is two weeks vacation and some paid holidays.

52 weeks X 5 days a week = 260 days.

260 days – 15 holidays = 245 days that you purchase coffee or make it at home.

Making it at home.

245 days X 22¢ = $53.90 for one year.

Buying it at Starbucks

I’ll use Starbucks as a default because even though diversity has become very popular with Americans, they obviously don’t like it in their coffee shops.

Now, a small cup of coffee at Starbucks (which they apparently call tall (?)…) costs $1.85.  

245 days X $1.85 = $453.25 for one year

The difference

$453.25 – $53.90 = $399.35.

So if you make coffee at home your savings per year would be $399.35.

Now here’s the key part.  If you put that in a Roth IRA, over 40 years at 7% – which is a realistic expectation of stock market returns – that would give you $91,285.03

That’s far from the million dollar claim of Mrs. Orman, but still a lot of money.  But 40 years is a lot of time too.

 

Bogeyman

Here’s the deal, it’s unlikely that coffee is the barrier between you and financial independence.  You can save far more money over 40 years by optimizing the big three expenses.  Your housing, transportation, and food costs are where you should focus to get to financial independence faster, plain and simple. 

“Doesn’t coffee fall under food?”.

Well, technically it does.  I drink black coffee which has fewer than 5 calories per cup, so it’s barely food 🙂

Bottom line, enjoy your life.  If your morning coffee shop ritual is joyful and important to you then keep doing it!  You can still achieve financial independence.  But you’ll have to be sure to optimize other things such as your housing and transportation costs. 

I would note however that going into a Starbucks or other coffee shop each day comes with other risks.  Be honest, do you only buy coffee every day?  How often do you cave in and buy one of those horribly unhealthy sugar bomb frappo things for $5.00?  Or that muffin or other pastry staring at you through the glass window?

Newsflash, that’s not a real breakfast and it’s not helping your wallet or your waistline. 

I wrote a post a while ago about how shopping at big box stores is risky because the sheer volume of merchandise makes it very likely you’ll come out with more crap than you intended to get.  And the same goes with coffee shops.

Look, I’m a coffee lover.  I love the smell of it, the taste of it, and rarely miss a day.  But, I usually make it at home.  No I’m not a flawless discipline-machine or a monk, and I do go to a coffee shop every once in a while.  When I do I always support local shops though.  I walk the talk of being pro-diversity, which means coffee shops too 🙂

So keep your coffee shop habit if it brings you joy, and ignore folks like Suze Orman who claim that the money you spend on that habit would get a 12% annual return over 40 years.  Shame on her, she knows the truth but might just be too addicted to her own cult of marketing to help herself. 

Focus on cutting the costs of the big three of housing, transportation, and food to maximize your savings and net worth.  That’s what will get you to financial independence faster.  And enjoy every coffee along the way.