Can't Retire? Blame Coffee!

Yes, I know. The title of this article has you in such a panic that you are rounding up all your coffee beans, gift cards and mocha choka pumpkin spice powders and hiding them in your safe like Gollum from Lord of the Rings. Don't worry, full disclosure: I do drink coffee and there is nothing better than that warm cup of heaven in the morning. The point of this article is not to attack coffee, but to illustrate how our habits can cost us our future.

Coffee is just a good way to illustrate it because for many people in the country, it's habitual. This may be shocking but the average American between the ages of 55 and 64 have only saved about $104,000 for retirement, according to a June 2015 Government Accountability Office analysis.

Let's get into why our daily habits help create this shortfall.

So picture this: You walk into your local coffee spot before work and walk up to the counter. The barista gives you a wink and takes your order for a pumpkin spice with extra amazing and then says, "That'll be $5". You hand him/her the $5 and hop in line to wait for that magical sound of your name being called. And then it happens, BOOM! Heaven has arrived! 

Now if I asked you what just happened here, most of us would say that you just had a religious moment in a cup, however, what has actually happened is that you have made the conscious decision to trade $159 of your retirement money for a $5 coffee today. What most of us don't realize is that as we move throughout our day, we throw little amounts of money at our daily habits, $1, $2, $5, $10 at a time. As we're doing this, we think things like, "Oh, it's just $5, no big deal", but in reality you are chipping away at your dream retirement. "But DJ, how do you come up with a $5 cup of coffee costing $159?". Well it's pretty simple. Let's get into the math.

"You have made the conscious decision to trade $159 of your retirement money for a $5 coffee today"

One of the most important aspects of investing is the amount of time that money is actually invested. It's really in my mind THE most important part of investing, other than staying away from complex financial products (but that's a completely different blog for another day). So in this example your age matters, but we can take a look at a few different examples.

In all of these scenarios, we are using an end date of age 65, which is the typical retirement age. We'll also use an 8% return to illustrate a growth investment.

If you are 20 years old, $5 compounded at 8% for 45 years = $159.60
If you are 30 years old, $5 compounded at 8% for 35 years = $73.93
If you are 40 years old, $5 compounded at 8% for 25 years = $34.24

As you can see, the earlier in life that you spend that $5, the more it costs you later in life. This is normally known as "Opportunity Cost." Let's also take a second to think about this. We're talking about 1 cup of coffee that you bought when you were 20. I don't know about you, but there is a large part of the world that purchases this liquid love once a day. Many make a second trip.  What about all the hundreds if not thousands that you have bought over your lifetime? Well lucky for you, here are the numbers.

For sake of argument, let's use the same ages and we'll assume that you stop at your local coffee spot only 5 days a week right before work. From my observations, this is a pretty reasonable habit to assume for a lot of folks. In this example you are spending $25 a week for your morning jolt. So what would happen if you had put that $25 into an investment account each week instead of happily waiting in line each morning?

If you are 20 years old, $25 compounded at 8% weekly (2340 weeks) for 45 years = $576,828
If you are 30 years old, $25 compounded at 8% weekly (1820 weeks) for 35 years = $250,401
If you are 40 years old, $25 compounded at 8% weekly (1300 weeks) for 25 years = $103,637

You can see where little habits, become big problems. What about the people who grab a cup of joe on a daily basis? Well, that is $35 a week and those numbers are simply just mind blowing.

If you are 20 years old, $35 compounded at 8% weekly (2340 weeks) for 45 years = $807,559
If you are 30 years old, $35 compounded at 8% weekly (1820 weeks) for 35 years = $350,561
If you are 40 years old, $35 compounded at 8% weekly (1300 weeks) for 25 years = $145,092

Let's take that in for just a second. One $5 cup of your favorite coffee, purchased each morning, could potentially cost you somewhere around $800,000 for that single habit over your lifetime. Now think about the many different things you do each day that throw another $1 at a habit. It's pretty amazing to think about.

As I mentioned previously, the choice of using coffee as an example isn't to say that you shouldn't drink coffee but it is an easy example of a daily habit that we can create early in life that can snowball into being detrimental to your future without you even realizing it. We could have easily substituted fast food, gas station stops, cigarettes or any other habitual thing we do on a daily basis. However, what is important is that you realize that every time you let a dollar go, you are giving up far more than the $1 given. 

So next time you are in line for your mocha pumpkin spice peppermint frappe espresso, just make sure you understand that it isn't just costing you $5 for that little slice of daily heaven but potentially your future.