How your coffee money could be put to work
If you’d like to provide some financial guidance to someone who has just graduated from high school or college, here’s a suggestion: a cup of coffee.
That’s something most young adults can relate to — and a topic more likely to get the conversation rolling compared to “opportunity cost” and “compounding,” which are really what the advice is about.
The idea here is that we all make choices every day with our money, especially on seemingly trivial concerns such as how often to visit Starbucks, whether or not to pack lunch, and how much to spend on clothing, vacations, entertainment and so on.
Every purchase we make takes money away from something else, including dollars that could be directed toward saving. This is opportunity cost.
Tracking the impact of these decisions over many years can illustrate how financially significant these choices can become. That’s compounding.
Fran Kinniry, an investment principal at the Vanguard Group, chose the example of a daily cup of coffee on the town to illustrate how the two concepts come together.
“What’s harder than getting your clients who are reluctant to save to have the discipline to regularly contribute to their investment portfolio?” he wrote in a recent blog directed at financial advisers. “Try explaining the benefits of compounding and the potential benefits of delayed gratification.”
Young adults and retirement
Kinniry’s discussion applies to just about everyone, though it’s especially relevant for young adults with many years of spending and investing in their future. The lessons also extend well beyond coffee, though the popular drink makes for a good example.
In his analysis, Kinniry assumed that you could save at least $1,260 a year, almost $3.50 a day, for each cup you brewed at home rather than bought at a