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How little daily treats can cost you a fortune

HOW LITTLE DAILY TREATS CAN COST YOU A FORTUNE

EVER since an Ethiopian goat herder named Kaldi noticed his charges became frisky after eating the berries from a certain tree, coffee has been synonymous with energy and stamina.

Monks brewed it to stay alert during the long hours of evening prayer. By the 16th century, throughout the Middle East, patrons visited coffee houses not only to imbibe the drink but to talk, watch performers, play chess and exchange news, to such an extent coffee houses were referred to as Schools of the Wise.

The European clergy grew suspicious of this “bitter invention of Satan” until Pope Clement VIII gave it papal approval.

Americans revolted against British taxes during the Boston Tea Party and took up coffee drinking instead.

New nations were established on coffee economies and, after crude oil, it remains the most sought-after commodity. Here in Australia, it seems we’ve overthrown the kitchen jar of Nescafe for the urbanity of sipping our store-bought lattes during the school run.

So why, after so many centuries of favour, has “a coffee a day” become the hallmark of profligate spending, and doing without said cup a day the new benchmark for fiscal responsibility?

For we’ve all heard it said, “rethink that one cup of a coffee a day”, “saving the cost of just one cup of coffee a day”, “you can save a life for the price of just one cup of coffee a day” …

And why, when our local politicians want to decry political activists such as the anti-Adani protesters, do they refer to them as “almond-milk, latte-sipping greenies from down south”?

I don’t think it’s the coffee per se. Most workplaces would go to war if the staff were denied their daily fix.

Medical research concludes that a limited quantity per day may actually be good for your health. And there are thousands of Rockhampton citizens who owe their living, in hospitality or retail, to the ever-popular brew.

No, I think it’s an analogy about how little spending habits, when they become ingrained habits, may cost us more money in the long term than the occasional splurge.

How easy it is to forget the power of small, daily savings. And the unthinking ease within which we fall into the conspicuous consumption trap.

These are the kind of uncomfortable truths which an initial consultation with a financial planner may bring to light.

Indeed, these little daily treats lie at the heart of many a marital discord when calculating who is ultimately responsible for the couple’s steady decline into debt.

What’s a coffee a day compared with the six-pack he brings home every Friday night? What’s a six-pack compared with the number of new shoes she buys to go out with the girls.

Somewhere in the mix, a $6 takeaway latte a day doesn’t seem so culpable.

This generation seems to have turned a blind eye to the immense power of small, incremental savings. The thrift of our grandparents’ era has all but given way to the spendthrift compulsions of whatever generation — X, Y, Z — it is that can’t be seen without a styrofoam adult-sized sippy cup in hand, regardless if they could just as well had made a cup at home before they went out.

Indeed the whole notion of home as a place within which to exercise domestic economy seems forgotten, judging by the drive-through food queues on any given weekday evening.

Parents, too busy working to support their family, have taken to buying $12 burger and chip combos without calculating both the health and financial implications.

Where we, as kids, only got junk food on birthdays or school holidays, today’s kids wouldn’t know what to make of a homemade meal if it were forced between them and the TV.

So, taking the poor maligned $6 latte as an example in the forgotten art of compound interest:

The parent of an 8-year old spends $6 a day on lattes which equates to only $42 a week but adds up to $2184 in a year.

Let’s say that instead of spending $6 a day on lattes, the parent puts that $6 into a ‘coffee jar’ (every year they add in an extra 5% to cover the rising cost of a coffee). At the end of each year, they invest the money in their ‘coffee jar’.

Let’s further assume the money invested at the end of each year earns 7 per cent a year (typical for a ‘balanced’ investment portfolio).

What amount would you expect to have been accumulated over 10 years? Would it surprise you to learn that it would add up to almost $37,000? The above diagram shows you how potent this trend becomes, as your tiny daily sacrifice gains momentum.

What’s really interesting to see is that the investment returns on the latte money saved increases at an increasing rate.

It starts at zero dollars in the first year, because, of course, during the first year the parent is simply putting the $6 a day into a ‘coffee jar’.

However, at the end of the first year, and at the end of each year thereafter, the ‘coffee jar’ contents are invested, such that at the end of the 10th year the accumulated amount has attracted $9468 in returns.

As Ben Franklin said, “money makes money, and the money that money makes, also makes money”.

So, the next time you see an Internet meme which asks a ludicrous question such as “Could you live on an island without internet and social media for a year for one million dollars?”, turn the question back to what you truly have the power to change.

What daily indulgence, no matter how innocently would you swap out in a heartbeat if you were promised a great big bank balance long after you’d finished missing that one thing?

Originally Published – Tuesday, October 8, 2019
Rockhampton Morning Bulletin – themorningbulletin.com.au