The majority of us are hooked on caffeine. We need it in the morning when we wake up to stay alert and avoid passing out, and we need it throughout the day for, well, the same reasons. I show up to work and see many people strolling in with their coffee mugs from home, or Grande Americanos from Starbucks or some other trendy coffee shop around the block. The coffee detriment is not referring to the detriment to our health, but rather the detriment to our wallets (as a matter of fact, studies have shown that coffee beans are actually quite good for you and can help prevent certain diseases and cancers).
It’s easy to forget about how much dependence we have on coffee and how much we spend on it throughout the week. It’s only a few bucks right? A few bucks here, a few bucks there, so what does 20 dollars spent during the week on coffee really matter for?
Sure 20 dollars during the week may not seem like much, and this cost could easily be avoided by just brewing coffee at home and bringing it to work, but what does this add up to over a one year period? How about over a lifetime of working?
The simple answer to this, some might think, is to just calculate the amount spent per week on coffee and multiply this by 52 weeks in a year. However, over a year, and the lifetime of working, many would not account for the opportunity cost of this money being spent on coffee. Where else could have this money been used for? Maybe another bigger expense like a piece of furniture or other material good? Sure, but what about the opportunity cost of not investing this money spent on coffee annually into a savings account and investing this money up until retirement? Let’s do a little bit of math here.
According to a 2018 study by AmeriSleep, 79% of Americans intake coffee every day, in which the average American spends $3 US on coffee daily. The study also shows average annual spend on coffee per gender, and per industry as shown in Figure 1 below (not surprisingly, finance is the highest…. probably correlated to stress and lack of sleep).
Figure 1: Average Annual Coffee Spend by Industry (USD)
Source: Amerisleep Study
As seen in Figure 2, spend also changes with age group, with people aged 25-34 spending the most (I can attest to that) compared to individuals aged 65 and above. Note how the younger age group is spending the most, and not the age group you would think that has the most savings and disposable income.
Figure 2: Average Annual Coffee Spend by Age (USD)
Source: AmeriSleep Study
The opportunity cost applies to the cost of not investing this money annually into North American markets. In other words, the opportunity cost is a compounded 7% annual return that can be converted to a daily percentage return, for every single dollar spent on coffee per day.
Let’s assume a working life span of 30 years, starting from someone in their 20s. Let’s assume $4 CAD is the average spent daily on coffee. This certainly isn’t hard to do at a trendy coffee shop where coffees can sell for over $5. Some individuals buy coffee more than once a day, while others spend little to none.
Spending $4 per day on coffee equates to $1095 per year. However, let’s compound $4 per day at an equivalent daily return rate that equals 7% per year when compounded daily. The results are astounding.
Figure 3: Cumulative Opportunity Cost of Purchasing Coffee Daily for 30 Years
Shown in Figure 3, the total opportunity cost of spending $4 on coffee daily over a 30-year time period is equal to roughly $143,000. Not only are we spending $44,000 over our working life on coffee, but the opportunity cost of not investing that money in the market over that time is $143,000. That is $143,000 of lost potential savings grown in a TFSA or RRSP that was instead spent on coffee. Increasing the daily average spend to $5 boosts the overall opportunity cost to over $178,000. A daily average spend of $6 inflates this total opportunity cost to a whopping $214,000.
The reason for ganging up on buying coffee is that it is an easy expense to avoid by simply preparing an alternative at home. Buying a coffee machine for a few hundred bucks (or reverting to the cheaper alternative of instant coffee), or even making coffee at work, can easily replace this frivolous expenditure that many of us willingly partake in daily. Sure, there are other things we could discuss replacing in our budgets like eating out, alcohol, or other entertainment activities, but coffee expenses are such an easy expense to replace that it’s worth talking and thinking about. It’s easy to become complacent around how much we spend on this category, and how much money we are leaving on the table over our working life for retirement. In a society where personal debt and insolvency are too common place, this caffeine detriment is an expense that can easily be removed from one’s budget without excuses, and help one focus on the longer term picture of a comfortable retirement and a world where personal debt is nonexistent.