Coffee and Finance

The 2020 U.S. Census found that the median income of households was $67,521 per year. In July of 2022, the average U.S. personal savings rate hit a near low of 5.0 percent, far less than the 10 percent minimum that most financial advisors recommend you set aside each year towards retirement. These numbers come at a time when, according to the National Coffee Association, Americans spend an average of $1,097 per year on Starbucks, Dunkin Donuts, and other take-out coffees.

Now, let’s take a look at a hypothetical family, the Smiths, that fit the Census Bureau definition of a “median household.” Tom and Jennifer Smith have been married for 5 years and have a 2-year old son, Bobby. Tom has been loyally working for an A/C company for a few years and through a promotion now makes about $55,000 per year. Jennifer works part-time at a medical office and makes $15,000. Together, the Smith’s make $70,000 each year, close to the median U.S. household.

Tom likes to grab a coffee almost every morning before work. He estimates that it adds up to about $1,000 per year. Stated alternatively, each year 1.4 percent ($1,000/$70,000) of their gross household income is spent on take-out-coffee.

Tom and Jennifer have made the decision to contribute 6.2 percent, or $4,340, of their salary each year to retirement savings (6.2 percent is the average annual deferral for a $70,000 salary).

If they continued saving $4,340 each year for 20 years, their retirement account balance would be $190,375, assuming a hypothetical rate of return of 7 percent. By year 30, when Tom and Jennifer are ready to retire, their account would have grown to be $438,657.

Now, let’s assume that Tom decided he wanted to stop buying coffee each morning, and instead invested the cost of coffee for the year ($1,000) into his retirement plan. With these additional savings, assuming the same hypothetical return of 7 percent per year, their account would amount to approximately $234,240 in 20 years. And in 30 years, it would be $539,730.

Thus — all told — a “small decision” about coffee results in saving an additional $1,000 each year over 30 years (or cumulatively about $30,000). With compounding, this “small decision” means the Smith’s have an additional $101,073 in their retirement account. That’s the true cost of a coffee — when compounded over time.