Alan Dauphin | Financial Blueprints & New England College Planning Associates
One of the least mentioned and understood forces in personal finance is what I call the “Coffee Cost”. In more technical terms it’s known as the “Lost Opportunity Cost” or “LOC” for short. This number represents the amount of money lost or paid over someone’s lifetime for every dollar they spend on coffee, or anything else.
In other words, it’s the total amount of money that could’ve been saved over a lifetime or had to be paid because debts were not paid down. There is no difference between a purchase and sending it off to a savings account never to be touched again by the individual. Once it is gone, it is gone forever. Some things are worth the cost, but when they are unnecessary and habitual, that’s when the lifetime cost gets out of control.
Here’s a realistic example. Meet Jack and Jill. They are both 35 and get at least one cup of coffee out per day, every day. Though this may not happen 365 days per year, we’ll assume that multiple cups and a snack here and there offset it so that it averages out.
Their favorite brew costs $3.50. For simplicity's sake, we’ll assume that the price never goes up because of inflation and there are no taxes. Jack and Jill’s one cup a day totals $7 per day, roughly $213 per month or $2,555 spent per year on coffee. To keep things simple, we’ll use the annual amount.
Over a 40-year span, age 35 to 75, in dollars spent, this adds up to a whopping $102,200. This isn’t the end of the story though, here’s where we zoom out and look at the “Coffee Cost” or “LOC”. Jack and Jill are diligent coffee drinkers, but had they been diligent savers with their $7 per day, what could they have at age 75 in their savings account if it yielded 3% per year?
Their balance grew from $102,200 to $198,429.73! That’s over $96,000 in interest! (Note: there would be taxes owed on the $96,000, but we going to ignore that for this example) This means that their price per cup is not $3.50 but about $6.80 per cup.
Now, let’s say that instead of being savers, Jack and Jill are savvy investors and get 8% per year on average in the stock market for 40 years. Their ending balance is now $714,850.56, bringing their cost per cup up to $24.48.
That is painful. Very painful, but there is still one more story Jack and Jill have to tell. They, like a majority of American’s, have some perpetual credit card debt. The balance waxes and wanes, but we’re going to assume that they carry some of it for the next 40 years, at 18%. (For perspective, modern credit cards with the magnetic strip were invented in the 1980s and Starbucks didn’t take off until the 1990s. The coffee and credit card combo is just beginning to be seen long-term.)
At 18%, their balance is a staggering $12,551,670.95.
It should be noted with credit cards (and other debt), Jack and Jill would not be able to compound the interest out uninterrupted on their own. A significant portion of the $12.5 million would be in the credit card company’s pocket. Since they are currently borrowing at 18% though, this is their true cost of money. If we assume, they saved their $2,555 + 18% interest each year at their investment rate, it would still grow to $843,511.86 and the cost per cup would be about $28.89.
This isn’t to say you need to give up coffee, I certainly haven’t, although I do brew at home, you do need to think about what you habitually and automatically spend your money on and judge if it is worth the “Coffee Cost”.