It’s time to face it, your morning coffee is costing you one million dollars.

I know what you’re thinking. There’s no way my grande soy vanilla latte, extra hot with light foam is costing me a million dollars.

Maybe your daily coffee habit won’t require you to shell out a cool million bucks on your credit card, but you are giving up the lost opportunity to add that million to your bank account.

Let’s find out how.

Cost of a morning latte across the US

Just how much is an average latte across the country?

As of September 2019, you could order a grande latte with no frills in the Starbucks app for an average of $3.97 (and that doesn’t include tax). You’re not getting a shot of vanilla or a sweet muffin on the side, but you’ll have your coffee. Below is a sampling of latte prices from major cities in all 50 US states.

Price of Starbucks grande latte by state

In reality, you may be spending way more than $3.97 on your daily habit.

An extra shot of espresso? Caramel drizzle? Gouda bacon breakfast sandwich? In no time you’ll be pushing $10.00 for your morning fix. Even worse? Maybe you ordered through Doordash to have someone bring it to you instead. Now you’ve got a price mark-up from Doordash and a tip to pay to your delivery driver.

The importance of compounding

To dive into the mysterious way we could save a million bucks, we need to understand the concept of compounding and why it’s so important.

We’ll start with an example.

It’s time for a math lesson

If I gave you $5.00 a day, every day for the next year how much would you have?

$5.00 X 365 days = $1,825.00

Easy peasy right?

If you took that money and put it in the stock market for 20 years and earned a 5% annual return, how much money would you have?

To figure this out, we need to understand something called the compound interest formula. The compound interest formula helps us figure out how much money we will have after a certain number of years. Another way to look at the compound interest formula is to think about gaining “interest on interest.”

Compound Interest Formula

Future Value (FV) = P (1+r)^Y
P = starting principle
r = interest rate
Y = number of years

For this example, we’ll take $1,825.00 and invest it at a 5% annual return for 20 years.

FV = $1,825.00 (1+.05)^20 = $4,842.27

Not bad for doing nothing with that money but leaving it alone.

Wait a second, I know what you’re thinking. “That’s all great, but my coffee doesn’t cost $5.00, I don’t buy it seven days a week, and you said I was missing out on a million bucks. Show me the money! ”

Million dollar coffee

Now comes the fun part. Instead of drinking a daily coffee, we’re going to put that money in the stock market and grow it over the course of an average worker’s career.

For this example, we’re going to assume you’ve purchased a grande latte from your favorite local coffee shop. It’s going to cost $3.85.

Assumptions:
Morning Coffee – $3.85
Average rate of return in stock market since 1926 (incl dividends): 10%
Inflation = 3% per year
Number of years worked: 46 years (Employed from 20 to 66)
Number of working days: 260

Let’s also show how disciplined you are to avoid coffee on the weekends (ya right!) and assume you get a coffee only on the days you go to work. Since the number of working days vary according to leap year, we’ll go with the least amount of standard work days of 260.

Ready?

Every working day for 66 years you’ll spend $3.85 on your daily coffee.

$3.85 * 260 days * 66 years = $66,066.

So at the end of your working career you will have spent $66K on coffee right? Not exactly.

What’s wrong with the equation?

Over time, inflation is going to cause your daily coffee to be more expensive. Don’t believe me? How much was your favorite coffee 5 years ago?

Back in my day, coffee cost 10 cents and I walked to school in the snow uphill, both ways.

What can we do instead?

Let’s invest that money in the stock market and (hopefully) generate returns that will compound nicely over time.

Back to our assumptions, we’re going to grow the cost of the coffee by 3% each year (the expected inflation for this example), along with an assumed compounded rate of return of 10% (the average stock market return since 1926, which includes reinvesting dividends).

You can calculate this on your own in Excel or check out this handy calculator at bankrate to do the math for you. You’ll get a slightly different answer as above because they use beginning of year compounding instead of end of year.

Issues with this method

In life there are always exceptions and sometimes things aren’t as they seem. Maverick Mouse is calling bull$h!t on believing it’s this simple. We have a few more issues we need to explore before we count on that million bucks.

10% stock returns are unreasonable

For anyone crying foul on a 10% stock return being unreasonable, I tend to agree. It’s not a reasonable assumption to count on. We’re going to take the guess work out and examine historic returns.

Let’s go back to the start of 2000 and look at the average returns for the last nineteen years. What would you find? Approx a 5.85% return (including dividends). That’s a far cry from the average 10% return.

What if you went back even further and started in 1933 (just after the great depression)? Now your returns are 11.2% (including dividends). We’re in the money now!

Date Range (ending Sept 2019)Average return (w/dividends)
1871 – Stock market begins9.0%
1929 – Great depression begins9.4%
1939 – Great depression ends10.9%
1969 – 50 years ago10.3%
1994 – 25 years ago9.8%
2000 – Turn of the century5.8%
2008 – Greatest crash since the depression10.8%
2009 – 10 years ago13.3%
2014 – 5 years ago10.6%
2016 – 3 years ago13.6%
2018 – 1 year ago5.0%

What’s going on here? Returns for the stock market widely fluctuate over the short term but have persevered with attractive returns over the long-term.

Know this. No one can predict the stock market and no one can guarantee you returns. If they do? First, run the other direction, and second report them some to government entity, because what they are doing is stupid at best and more likely illegal.

Knowing we can’t predict what the stock market will return in the future, what can we do?

Many experts believe a “safe” return rate to be around 5%. Why? Because in the long-run, even with wide swings in the market, if you’re in it for the long-run and you trust past performance of the market you’re likely to get at least 5%. The 5% so called “safe” return rate is also the basis for the 4% safe withdrawal rate that many early retirees use to determine if they can actually retire early.

Taking our original coffee assumption and changing only the return rate to 5%, we end up with $277K. That may be a far cry from a million bucks, but it’s nothing to turn your nose up to.

And if your daily coffee habit is closer to $7.00 a day? You could end up with a cool $500K+ on a 5% assumed return.

One million isn’t what is used to be

We know the stock market can’t be predicted but we also have another problem. Inflation is eroding your purchasing power. If I gave grandma mouse $500.00 back in “her day.” She gets to enjoy 5,000 cups of coffee at 10 cents per cup. Yee haw that’s a lot of caffeine. If I give you $500.00 today to buy that same grande latte, you only get to purchase 129 of those delicious coffees.

Yikes, what happened?

Inflation causes the price of goods to increase and you need that much more money to maintain your purchasing power. In fact you would need $19,250 at $3.85 per coffee to have 5,000 cups.

Let’s go back to grandma mouse for a moment.

Grandma hates the stock market and is afraid of banks. She takes her $500 and put its under her mattress for 10 years. How many cups of coffee can she buy after 10 years assuming a 3% inflation rate? For this example we’ll assume her coffee costs $1.00 the day she put the money under the mattress.

Initial amount: $500.00
Grandma’s Cup of coffee today: $1.00
Cup of coffee in 10 years (3% inflation): $1.30

# of cups she could buy today: 500
# of cups she can buy in 10 years: 384

I don’t know about you, but I’d rather not miss out on 116 delicious cups of coffee.

Going back to our million dollar example at a 10% return, even with $1 million dollars in your bank account, it won’t buy nearly as much as you think.

Your “real” purchasing power after 66 years (assuming a 3% inflation), would be approx $256K.

I know what you’re thinking. I still want my million bucks you promised me if I stop drinking my daily coffee. Sorry, life doesn’t work that way. The alternative isn’t better. If you didn’t invest that money and put it under your mattress instead, you see what happened. We lose our purchasing power.

Plus, you still have some money in the bank vs drinking it away.

To protect against inflation, we have to invest our money somewhere to maintain some semblance of purchasing power in the future.

The bottom line

Compounding can’t be ignored and is something we need to embrace to protect our future.

Start saving early and often, your future self will thank you.

“But my coffee, it’s so warm and delicious and it gets me through the day. I can’t possibly give it up. “

Ok, you know what, you’re right. You keep working at the job you hate, with the boss you hate and the coworkers you hate. I’ll just be…at the beach.

Coffee lovers aside…anyone else willing to forgo less than $5 bucks a day for the chance to become a millionaire one day?

The information contained on this website is for entertainment purposes only and references only opinions of the author. Nothing contained within should be considered professional, financial, legal, tax, psychological, safety or investment advice. Seek advice from a duly licensed and/or registered professional that can help with your specific situation.