August 7, 2011, 5:00 am

Why Cutting Out Your Starbucks Won’t Make You Rich

by: The Financial Blogger    Category: Rat Race
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Starbuck CoffeeI am sure you have read or heard about the latte factor. The idea that if you cancel your morning Starbuck’s latte, you can save thousands of dollars. At first, the idea is pretty seductive. In fact, it is as seductive as a tall woman with high heels and a red summer dress. However, I can tell you something: both cutting out your Starbucks or talking to the nice looking woman won’t make it happen!

 

What’s the latte factor and how does it work?

Coming from the doctrine of the church of Frugality, cutting down on your morning coffee comes from the principle of saving on the little things over your lifespan. Technically, if you save $5 per day (the price of your latte) and you invest it at 5%, in 30 years, all your Starbucks will be worth $83,225 (assuming you are investing on a monthly basis). Wow, this means that while you are taking a sip of your latte this morning, you are actually drinking away almost $100k!

 

$83,000… really?

Well, this is just quick math as you have to take into consideration that:

#1 Chances are you will keep on drinking coffee and just choose a cheaper option (such as bringing your coffee machine to work). So you won’t save the full $5 per day.

#2 Chances are that since you are being frustrated on a daily basis (assuming you really like to pickup your coffee, and this example can be applied on something else that you like to spend money on daily), you will spend a part of this money elsewhere by “rewarding” yourself for saving “so much”.

#3 The 83K doesn’t count inflation. At a 2.25%, this only equals 42K in today’s dollar. I don’t know about you, but I’m  not particularly impressed by this results especially since I would have to wait THIRTY YEARS to use it!

 

Why Being Frugal Won’t Make You Rich

Regardless if you drink coffee or not; the point is that cutting down on small expenses won’t make you rich. I think it only creates little frustrations on a daily basis. So I’m asking you: why would you frustrate yourself during the next 30 years?

 

Being frugal will leads to a ton of questions:

- do you spend money on vacation?

- have/will you buy a bigger house, a nicer car, a better computer, a home theatre?

- renovate your kitchen, bathroom?

- do you buy ticket for shows? Play sports? Buy token gifts for the people you love?

 

Basically, each time you are opening up your wallet, ask yourself the famous question:

Is it really worth it?

 

Chances are that it’s not. But chances are that you will regret it later on. A few years ago, I went on a foreign student exchange program. I had spent about $15,000 over 6 months in Europe and this was one of the best investments of my life as I had seen things that I will probably never have the chance to see again in my life… until I turn 60 and retire! The $15K could have been saved, invested or used a down payment for a house. Instead, I went into debt and traveled the world. Ten years later I can tell you that it was one of the best financial decisions I ever made!

 

In fact, 30 years from now, you won’t regret your nice vacation by the beach, your nice house or your morning latte if you have them. But you will surely regret a mediocre life over 30 years just to be able to pay for your morning latte at the age of 60!

 

What will make you really rich

What makes people rich is passion; not frugality. The way I see it, your brain is the most valuable asset you have. You keep it busy with meaningless questions such as “what is better? A latte or small coffee to save $2 today” and you keep annoying the hell out of it with small frustrations and telling yourself “I can’t”, “I don’t have the money”, “I would rather save than spend”.  Do you really think your brain will reward you with the greatest ideas to make money? Nope. It will tell you to go to sleep early in order to not be too tired tomorrow and to keep your 9 to 5 day job.

 

However, if you drive your brain with great ideas and passion and use small rewards to keep yourself going; you will discover a whole new world of possibilities. Some people that follow my net worth update will say that I am running directly into a brick wall with the amount of debt I have. However, I can tell you that 5 years ago, my net worth was barely positive and today, I am looking at almost $200K. I can also tell you that 5 years from now, I will be closing in on $1M in net worth. How am I going to do that? By working hard and smart and by rewarding myself with my morning Starbucks!

 
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Comments

by: Millionaire | August 7th, 2011 (8:33 am)

Hey TFB, For once I disagree with you on this. If one’s’happiness depends on the morning latte they drink I tell them get a life! I, like a lot of people working downtown mtl have free coffee paid by the company I work for. We have fancy coffee machines with real good coffee. But people go to tim hortons or starbucks anyway. I once worked where the coffee was free but not good and started buying my coffee at van houtte. 3 coffees a day and a month later I realized I was drinking the equivalent of my monthly phone, internet and cable bill together when all I had to do was to buy a 10$ can of coffee from the grocery store.

I am with you on this post – if drinking Sbuks or any other 5 star quality coffee makes you happy then you shouldn’t really cut it out. I find it a joke when people say cutting out your Starbucks will make you rich. Sure there are ways to optimize your habits, as the Millionaire suggests by purchasing your own can of coffee, but that can be a whole another discussion in itself. All actions have relevant reactions.

Lol I must agree as I’m typing away at my local Starbucks at this moment. I find that saving money on coffee is fine if you really need to. It’s just like saving money by not going on vacation. Sure you have more money, but at what cost to your quality of life?

I love my morning coffee. It gives me a boost. It’s often a social event where I meet with someone. I see nothing wrong with a cup of coffee.

The biggest piece missing in this financial equation is actually labor. People mentally get it in their heads that Starbucks doesn’t pay their employees for some irrational reason, because the biggest expense of a retail cup of coffee is labor — not coffee, not rent, not even profit.

Go to a restaurant versus eating out, and everyone presumes the staff are getting paid and that’s part of the equation. They wisely realize that they’re willing to pay someone else to cook the food, clean the toilets, and clean the mess up at their tables. But people have a major blind spot for the staff that make coffee, presuming that the coffee just arrives by itself and makes itself.

Problem is that everything that’s driven primarily by labor costs is that it works only if you pick up the labor yourself. Meaning: you have to value your own time like a minimum-wage fry chef. With coffee, people presume their own time and labor is free — so the equation looks lopsided.

I can agree with you to a point. If Starbucks is really important to you then it wouldn’t be smart to skip it. Many people just have their daily Starbucks out of routine though and aren’t getting actual enjoyment from the experience. Frugality alone won’t make your rich but part of being frugal is being conscious of your spending and I think that can help you become rich. There are rich people such as Warren Buffet who are noted for their frugality.

Live is too short to drink bad coffee. Long live Starbucks!

If I wanted a tasty beverage, I’d drink grape soda. No particular version of coffee, without tons of sugar and creamer, is delicious. Since I drink coffee primarily for the caffeine, I’m totally satisfied with the free stuff provided at work.

I believe it is important to spend your money on what you enjoy as long as you’re living well below your means. If I’m not deriving much satisfaction out of a particular purchase, large or small, I skip it.

This is the constant debate I have with people on personal finance sites. It is so much easier to increase your income as opposed to trying to cut expenses to the bone. I’m all for being fiscally responsible, and I usually don’t stop to buy coffee (more of a time management thing than a frugal thing), but it really isn’t that big a deal over a long period of time.

What I can’t get over is the amount of people that will put effort into cutting out coupons, and looking for the absolute lowest prices on everything, but yet have no idea where their investments are at, or spend only a few hours making mega decisions like buying a house, or signing yet another 5-year set rate mortgage.

@Millionaire,
the point is larger than just the coffee. I took the coffee example as many people can relate to it. However, let’s say that what makes you happy is to go golfing, or having a beer with your buddies, or going to the theatre with your spouse or brining your kids to the movies or anywhere else. All those things cost small amounts of money but are recurrent. But cutting on those, you take away the small joys of life.

For example, this weekend, I went at the driving range with my 5 years old. I’ve spent a magic “dad-son” moment… for $16. That’s actually 3-4 coffees ;-).

@Greg,
I’m happy you bring this point as I had a discussion about this with one of my friend: the timre required about something vs the cost of having someone else doing if for you.

It’s all about how much you can make per hour vs how much it cost to do something!

@Andy,
I understand your point but I have a question for you:
Do you think that Warren Buffet it rich because he is frugal or because he’s one of the best investor in the world? Buffet could spend all the money he wants or save it all, he will still be rich. His ability to invest in the right corporation made his wealth, not driving is old car and being low profile.

@Teacherman,
You remind me of my mother who uses to go at 4 different grocery stores to buy food… thinking she was saving with coupons while not factoring the whole afternoon she lost running after rebates!

This is one of the very best posts I’ve read in a long time. I could not agree more.

Life is a one way trip and needs to be enjoyed. The key is to live it in some fashion that allows you to achieve a balance.

Don’t want to cut out the lattes, then just don’t. Make an adjustment elsewhere.

Love fresh cut flowers in your house, get them. Find something else to trim. Live life and love the life you live.

DH and I are frugal by nature – me the more so – but I recently did some number-crunching and discovered that having even an extra $100/month to invest doesn’t make a huge difference over ten yrs.

While that’s not going to make me any less frugal – it’s just part of who I am – I have to agree that passion is what makes the difference between the middle-class and the rich.

If you think about it, this sort of alludes to what’s happening in the states righ tnow. Much like you can’t frugal your way into being rich, you can’t keep cutting costs into paying off your debts. Both scenerios require an increase of income, not a decrease of spending. Tell Obama he can keep buying starbucks as long as he increases taxes :)

Wow, remarkably similar to my post this morning about how frugality is nice when we cut out unnecessary expenses, but there’s a limit to how much we can save. Eventually, we need to move on to making more money because that’s the best way to increase the gap between income and expenses!

by: The Financial Blogger | August 8th, 2011 (11:55 am)

@DanP,
I definitely think they should raise their taxes. Canada did too (with the GST) back in the 90′s and it worked well!

@Daniel,
I guess it was a good thing that I have published it by mistake yesterday ;-).

I enjoy my morning coffee & tend to view coffee as a means in making me more productive.

Even though I have fresh ground coffee at home, more often than not, I have to have to head to Tim Horton’s for my morning coffee because it gives me the boost I need to focus on what it is i do best and accomplish what needs to be done in the run of a day.

I remarkably disagree to this post. No argument in this world can make me believe that cutting on Starbucks will increase frustration.

And what Starbucks has to do with buying house or renovating kitchen

by: The Financial Blogger | August 11th, 2011 (8:42 am)

@SB,

The point is not about the having a Starbuck, it’s about all the little expenses that can makes you happy or not. It’s about cutting down on your lifestyle thinking that you will become rich that way. It will just not happen.

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by: Millionaire | August 14th, 2011 (9:40 am)

@TFB and all,

Most people who go to starbucks every morning enjoy buying good coffee as well as to go golfing, or having a beer with buddies, or going to the theatre with spouse or brining kids to the movies or anywhere else. All those things cost small amounts of money but are recurrent (note that I copied and pasted your answer above :). I have nothing against that but you can’t have everything unless you are a Millionaire :) People like to have it all but the truth is DEBTS COME OUT OF THEIR EARS. See what’s happening in the states these days. And their gov’t keep telling them to consume and spend more to re-start the economy. They didn’t understand at all. People don’t understand the value of hard earned money. Actually it’s not my problem it’s theirs.

by: The Financial Blogger | August 14th, 2011 (6:46 pm)

being frugal will keep you out of being in trouble but it won’t certainly not make your rich :-)

by: Millionaire | August 14th, 2011 (9:09 pm)

True. Sorry I got carried away from the subject.

no worries, I was looking from strong comments when I wrote this post ;-D thx for commenting!

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I realize this post is extremely old but I had to chime in…

I think you’re taking this a bit too literally.
The whole Starbucks thing started as a simple way for financial planners to illustrate what people spend on things daily (That could be cut out) using something they do themselves.

The client(s) could easily see how much they would save and therefore be able to invest each month cutting out simple things… Which brought them to the main purpose for the exercise… Dollar Cost Averaging into funds the planner was selling. LOL