I never gave the humble cup of coffee much thought until I went down the rabbit hole of online financial advice.
Little did I know my energizing beverage of choice was a flashpoint in the clash of personal finance titans.
“No, you’ll never get rich going to Starbucks each day!”
“No, losers are frugal; winners figure out how they can afford it!”
“No, invest the price of a daily latte into index funds and you’ll be a millionaire in 30 years!”
“No, hustle and grind so hard you don’t even have time to buy coffee!”
Who knew a mocha had even more symbolism than sugar?
It seems we have two equally strong but mutually exclusive schools of thought. Normally I’d ignore them all and get on with life, but if my whole financial future is at stake (that’s a big “if”) then it’s worth settling the matter.
Now, I’m not naïve enough to think I’ll actually settle this internet debate here and how. But what I will do is explain the two schools of thought that keep it raging, and see whether they’re really so mutually exclusive after all.
Spoiler alert: they’re not. They simply reflect different assumptions about opportunity cost.
Put it down and walk away: the frugality argument
Compound interest is great if you’re on the right side of it. Thing is, we forget that it applies not just to our investments but to our opportunity costs, as well.
For instance, let’s say our proverbial daily coffee is around $3 and change, or $100 a month for a nice, round number.
Investing $100/month at 7% annual returns will give you $17,409.45 after a decade.
But by the same token, spending $100/month that you could have invested is worth -$17,409.45. That negative sign is the basis of the frugality argument. It’s your opportunity cost, down to the penny.
So, you’d rightly reason, skipping the coffee and diligently investing its cost leaves you better off. (Of course, you can swap coffee for any small, optional, daily expenditure. It’s just an example.)
Perhaps even more importantly, passing on the “luxury” cultivates a mindset that leads to savings and long-run benefits in other aspects of life, all of which add up to far more than $17k in a decade.
It establishes a virtuous circle, in other words.
Empirically and experientially, that’s hard to argue with.
But is it the whole story? Perhaps not.
This round’s on me: the hustle argument
On the other side of the spectrum, your time spent making coffee is worth something, too.
Perhaps buying it saves you 10 minutes of prep and clean-up each day, or 5 hours per month. And perhaps you could use the time savings for something worth $30/hour. Just buying the coffee means you’re effectively paying $100/month to earn $150/month ($30 * 5), which leaves you better off.
It follows that your opportunity cost of DIY coffee is -$50/month.
But there’s a critical assumption here: whatever time you save by paying more goes to directly productive purposes. You can decide whether that’s realistic for you, but for most people, it’s not.
(Never mind that buying coffee in real life usually requires a detour and a short wait in line, which might make the time savings a wash. Not to get pedantic, but it does make the whole debate seem moot.)
But in fairness to the buying-coffee-doesn’t-matter crowd, there are two more facets we need to explore.
First is the point that $100/month on coffee, and perhaps that much more on other conveniences and indulgences, pales in comparison to the financial impact of buying a house or even an expensive car.
If you choose housing and transportation frugally, then you’ve already optimized the majority of your financial life. Other things don’t matter much because they can’t matter much. They simply aren’t game-changers in the big picture, especially if “indulging” frees you up for high-value activities.
Second is the point that continual and stringent frugality reinforces a pessimistic mindset of money as a scarce thing and a zero-sum game.
When you live as though there’s plenty, you’ll instill confidence that there is in fact plenty. Some would go on to say nonsense about “manifesting abundance,” but it’s really much simpler and less metaphysical. When you continually remind yourself that you’re not desperate, you won’t perceive the need for a quick buck and take desperate steps to make or save that quick buck.
What kind of life are you trying to live?
This is the crux of the matter.
If your “best life” involves wringing ultimate efficiency out of every waking second, then don’t touch that coffee pot or AeroPress. It’s counterproductive and irrational to waste a single second on anything but that which you do most efficiently.
And if you believe that spending money mystically attracts money, then you know what to do. (I’d argue you’re in for a harsh surprise, but that’s another matter.)
But if you’d rather not worry so much about squeezing out productivity like the last drop of juice from an orange, then spending less gives the freedom to relax without digging yourself into a massive financial hole.
As I hope is clear now, both camps come down to opportunity cost. One assumes you can and always will use the time savings for something marginally more valuable. The other assumes that’s not realistic.
If that were the end of the story, then we’d be at an impasse. I don’t know exactly how much my time is worth, because the future payoffs of whatever I use it for fall somewhere between zero and a whole lot.
But they’re not mutually exclusive, and that’s a very good thing. Each extreme also incurs an opportunity cost in happiness.
It’s almost always the case that when two opposite camps each contain a grain of truth, the prudent approach is somewhere in the middle.
Of course it’s worth trimming the fat now to facilitate good long-term investments. But unless that $100 a month is your entire disposable income, you don’t need to shave off every penny of spending to do so. Discretion and mindfulness are essential to drawing a healthful, sustainable line.
And of course increasing your income has more upside than cost-cutting, which has a strict floor at $0. But if pursuing income leaves you racked with guilt over pulling your nose away from the grindstone, then it will fail to make you happy. Discretion and mindfulness — you guessed it — are once again essential to drawing the line appropriately.
If you’ve stayed with me this far, you might think I’m about to reveal a grand unifying theory of spend versus saving. I won’t. In fact, I’m only building up to a common, even hackneyed, aphorism that emerges everywhere: moderation in all things.
Moderation in spending, lest conveniences and indulgences rob you of the financial future you’re working for.
Moderation in striving, lest insatiable drive deprive you of tranquility and simple joys along the way.
Those are flip sides of the same coin. They’re flexible and complementary practices, not dogmatic and opposed ones.
Whatever the actual opportunity cost of your time — and coffee — the cost of obsessing about it either way is higher.