Stop The Coffee!
Is Coffee Hurting Your Wealth?
It’s not just the Coffee
In today newsletter we are going to focus on coffee (that is to buy coffee from a shop such as Starbucks), however if this is not something that is applicable to you and your life you could substitute this out for other items such as meals out, overly expensive items of clothing or even a financing a new car.
Inflation Is Making Everything So Expensive!
Inflation is the measure of the increase in the price of services and goods.
For example, if we say that the inflation rate in the USA was 6% in 2023, this signals that the price of goods and services increased by 6% from the previous year.
Key Fact: The average inflation rate per year in the USA was 4% over the last 40 years.
This means that if you did not receive increases to your dividends, your salary or any other income producing asset by 4% over that period you were taking a pay cut and inevitably losing your purchasing power.
We can show this by the above example.
Coffee Price in 1970 = $0.25
Coffee Price in 2022 = $1.85
This is an average increase of 3.92% per year over the last 52 years.
How Much Is My Coffee Costing Me?
We can see that the price of a Starbucks coffee differs depending on where you live.
For today, we will take an average of $4 which we deem to be reasonable.
Peter loves his Starbucks Latte and buys one every single day.
Therefore he spends, on coffee:
Weekly = $28
Monthly = $120
Yearly = $1,460
Now let’s assume that Peter does this for 30 years, this will total $43,800.
What does Peter get from this purchase? - He gets a nice caffeine boost from a branded coffee that he loves every single day.
What Is The Opportunity Cost?
The opportunity cost is the potential benefits an investor or individual misses out on if they choose an alternative option.
Now let’s assume Peter doesn’t buy his coffee from Starbucks and instead decides to invest it into the S&P500.
The S&P500 returned 10.22% over the last 30 years on average, so Peter would now have $258,325.
As we can see from above, he has started with $0 and invested for 30 years $120 a month with a return of 10.22%.
This would mean his balance now would be more than a quarter of a million of which only 17% is from his contribution and 83% is from the return on that investment! That is insane, and should be read again!
So tell me, is having a branded coffee every day for 30 years worth the opportunity cost of missing out on $258,325?
Alternatives
As we mentioned earlier, if coffee is not applicable to you then can use the same example but for other items such as expensive luxury items per above.
Starbucks Review
For those that are interested we have reviewed Starbucks (SBUX) stock on our YouTube channel below:
You can also grab a copy of the valuation model used in the video above here:
Conclusion
Whilst we understand that life is meant to be enjoyed and we shouldn’t be investing all of our money as no one knows how long we have left on this planet, it should be a reminder that when you do most things in excess you are missing out on a significant amount of money for your future self.
Have that branded coffee, buy that Chanel bag, but do it in moderation and make sure it fits within your budget and goals for the future.
If you’d like to support this work feel free to buy me a coffee. The proceeds will contribute to the running costs of the newsletter.
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Note: I am not a financial advisor or licensed professional. Nothing I say or produce anywhere, should be considered as advice. All content is for educational purposes only. I am not responsible for any financial losses or gains. Invest and trade at your own risk.