What a few weeks it has been! I was so excited when my first book, The Joyful Frugalista, was released on 4 February. And with it, has come a lot of media attention. I’ve gone from being a Canberra mum in the suburbs to appearing several times on TV and speaking on radio. Literally. I feel incredibly blessed that my key message of mindful saving and financial resilience resonate with most people.
But not all.
Friday night we were at a housewarming party for one of Neil’s friends. It was mostly guys from Neil’s work talking about the technical things they do, plus some wives and spouses. As he was leaving, one of Neil’s friends said ‘oh, I saw you on TV this week’.
‘Which one?’ I answered, wondering if it was Sunrise.
‘The Project,’ he replied.
What happened was that I stuffed up, tripped over my words and said something by accident. When talking about the savings you could make from drinking tea rather than coffee, I said ‘you could save hundreds of thousands of dollars’. I must have had fairy bread sprinkles in my head. I meant to say ‘hundreds, possibly thousands, of dollars’.
On The Project they quipped that I must drink a lot of coffee, and then had a mighty big laugh at my expense.
I don’t drink ANY coffee. I can’t drink coffee, but in any case I try not to buy too much take away anything. And that was the point I was making – simple changes to daily habits can help grow your savings.
At first, I was a bit upset, but having considered it more, and crunched the sums, I believe that the big laugh is on the Project – because they don’t understand the power of compound interest. While I didn’t convey what I meant to say correctly when I crunched the numbers, I was (somewhat accidentally yet conveniently) right.
Yes, over your working life, if you invest what you would spend on take away coffee rather than spend it, you can indeed earn hundreds of thousands of dollars.
In fact, you can be a millionaire.
Einstein has been credited with describing compound interest as the eighth wonder of the world. In my book, The Joyful Frugalista, I talk about how little savings do matter, and how daily saving habits are incredibly important to long term wealth creation. Every dollar, every single dollar, counts.
The cost of take away coffee over a cup of tea
If you spend $4 every day on buying a cup of coffee, that equates to $28 a week or $1,460 a year. I know many people who drink not one, but two or even three or four take away mugs of coffee a day – even on weekends. And often they will pick up something extra to go with it – an extra shot of syrup, a chocolate brownie, a date scone, a healthy muffin or an egg and bacon roll. Or take away lunch.
But let’s just stick with one cup of coffee for now, and let’s assume that rather than contributing to landfill, that a reusable coffee receptible is used (often it isn’t – the War on Waste has documented the impact on landfill that results from overuse of take away coffee cups).
I’m a tea drinker. I never really got into coffee, which is a good thing as it is highly addictive. On the odd occasions that I do drink coffee, I can’t go to sleep at night and I run around all day multitasking quickly and performing tasks badly. I’m not really fun to be around when that happens. I used to have an addiction to buying chai lattes, but I have cut back on them due to the high sugar content.
I usually drink ‘Diplomat’ branded tea from ALDI ($2.29 for 100, working out at 2 cents each tea bag), and I have several per day – and often reduce costs by sharing a tea bag with my husband Neil. But for the sake of these calculations, I’m going to assume I use one whole tea bag of Dilmah extra strength (on sale last week at Coles), with a splash of milk. Each tea bag costs 3.5 cents, and a splash of milk a bit more. I’ll calculate a cup of tea costs between 6c and 10c, but use the upper limit of 10c. That equates to 70c a week or $36.50 a year. And because I am enjoying the cuppa at my desk away from the café, I am less likely to spend on other yummy food (and I’m using my own tea cup so it is better for the environment).
So, right there I would save $1,423.50 a year just by drinking a cup of homemade tea each day rather than coffee. In ten years’ time, this would amount to $14,235.
Assuming you start work after you leave university at age 23 and retire at age 65, you would work for 42 years. In reality, many of us will work for longer. If you drank one cup of take away coffee per day over your working life (noting here I am not accounting for inflation – in reality, you would put in more savings as the cost of coffee goes up), that would amount to $59,787. Voila, tens of thousands of dollars (but not yet time to celebrate with a big pink hundreds and thousands cake).
|42 years (to retirement age)||0||$59,787|
But wait – there’s more.
[Note: I used the Compound Interest calculator at Moneysmart.com. It rounds up to the nearest dollar, so I used $4 for all the following figures. Okay, I know it’s not quite the same as $3.90 – but it is fairly close.]
High interest saving account
If instead of just spending your take away coffee savings, you invested them in a UBank online savings account that earns 2.87 % per annum (no fees), you would end up earning much more.
After one year, you would earn $19 in interest and the total would be $1,447. After ten years it would be worth $16,517 (total interest $2,237). By retirement age, it would amount to $118,697.
|$4/day @ 2.87%||Interest||total|
|42 years (to retirement age)||$57,377||$118,697|
Raiz (formerly Acorns) is a micro-investing application that is targeted at millennials. It charges $1.25 per month in account keeping fees up to $5,000 (after that it charges 0.275%). It has one competitor – Spaceship Voyager – which does not charge any fees for deposits under $5,000.
Raiz claims an annual return of around 10.1%. Last year wasn’t so good for the sharemarket, but assuming this as an average return (noting that I haven’t taken the fees into account) this is how it stacks up:
|$4*/day @ 10.1% plus fees||Interest||total|
|42 years (to retirement age)||$911,865||$973,185|
Yep, you read right – if invested $4 per day into Raiz, over the 42 years of your working life you would contribute $61,320 and earn $911,865 in interest.
The good thing is about Raiz is that it is an easy to use mobile app. So, while your friends are standing in line buying a coffee, drink your cup of tea and transfer $4 into your ‘I want to be a millionaire’ fund.
But wait … there’s more.
Changes to super limit annual contributions to $25,000 each year. This means that you can’t just play catch up later in your working life – the system now encourages you to save early and save regularly.
If you deposited $4 a day ($1,460) into superannuation, you would see big returns. Even better, you can salary sacrifice that amount to make your dollars go further. Assuming you earned more than $90,001 and were paying 37% in income tax, salary scarifying your $4/day, $1,460 a year coffee money would enable you to effectively make $5.11 a day or $1,867.70 a year in contributions (thanks to my husband, Neil, for these calculations).
These calculations take into account the 15% in tax you must pay when you deposit money into super. But this is still a lot cheaper than other forms of investment that realise capital gains tax when you withdraw them.
Given the long period of time in which super is held it is difficult to calculate returns. Last year, for instance, was not a good year for shares. But historically most funds average out to better than 10% (e.g. HostPlus earned 10.9% over five years to 2017). I haven’t calculated fees into this, so that would affect final returns, but once again, this provides an approximate snapshot.
|$4*/day @ 10% plus fees (15% tax included)||Interest||total|
|42 years (to retirement age)||$1,129,486||$1,208,110|
Yep, you would well and truly be a millionaire if you put your coffee money into super over your working life. On just interest alone.
Are coffee drinkers destined to a life of poverty?
Even back before I gave up coffee, I made a point of not spending too much money on take away coffee (or lunches, or food, or pretty much anything else). This is because I understood how the little savings add up. Eating and drinking out are one of the few areas of true discretionary spending, and it is an easy way to cut back if times are tough.
If you do love your coffee, you could make your own plunger or aeropress coffee at work, or even use a pod machine (note the pods are difficult to recycle). A good friend has a business selling high quality, home roasted ethical coffee beans – why not invest in the best if you love coffee. If your daily takeaway or sitdown shop bought fix is important to you, then continue to support your local cafe – I’m not judging you. My Dad enjoys a walk to a fabulous café in Melbourne most days and sitting down and enjoying his brew is a highlight of his day. Cafe owners are local businesses that rely on our support. For me, cafe coffee (or tea) is an occasional treat and usually something I only do when I am in a social situation. Like taking someone out to coffee to (politely) pick their brains about something.
But the point of this article – and indeed of my book – is not to make fun of coffee drinkers, but rather to demonstrate how every dollar counts. Every little amount you save and invest is valuable and will help you to live an abundant life seemingly effortlessly. Switching homemade tea for café coffee really will save you hundreds of thousands of dollars in the long run – I guarantee it. If that’s not your thing, many of the other savings tips in my book – and on this blog – will achieve a similar result.
Do you drink take away coffee? Or do you drink tea? What little changes do you make that help you save?