What is coffee math or the Starbucks fund?  It is the potential savings one can accrue by postponing some immediate pleasures and investing for the future.

Well, you may be wondering, why is Inspiware.com, which is a personal and professional development site interested in savings? That is a good question.  The reality is holistic progress includes mind, body, spirit, family, friends, and finances.  If one of these aspects is in serious trouble; life cannot be a dream.

For example, let’s assume you are focusing on getting promoted at work and need to account for some “above and beyond” contributions. But if you have a substantial credit card balance and are struggling financially and are on the verge of bankruptcy your state of mind and resulting stress and tension make it impossible to concentrate and do your best.

Having peace of mind on the financial front allows for being your best in other aspects, and good habits tend to percolate across different facets of your life.

So, what is the Starbucks savings fund or the coffee math mean?  And how do you balance the instant enjoyment and deferred satisfaction not just regarding coffee but many other aspects?

Plus, while we are illustrating the scenario with coffee, it can also apply to various other expenses – a bagel and cream cheese in the morning, a turkey/avocado sandwich in the afternoon, and an afternoon pick me up a treat. (In all these cases, getting something from home will be cheaper, healthier, and saves time and effort.)

The millennials and the avocado toast have become a social meme.  While it is easy for the internet to make fun of anything and everything, there is a grain of truth in how people perceive the spending and savings paradigm.  Does spending on what makes us happy good or bad? If frugality and postponing enjoyment a virtue? But what if in old age, one has money but no appetite or interest?  What is an acceptable indulgence and what is extravagance in light of the fragile financial state?

Let’s take the case of Ryan M, an up and coming business analyst in a project management office in Minneapolis.  Ryan makes $93,000, a little bit more than the average business analyst salary in the local area. He tends to stop off at a nearby coffee shop and pick up a Latte from a local chain. With a tip, the cost for each coffee rounds off to $5.00.  And he goes for another round of coffee at around 3.00pm as a pick me up.  At times, along with the coffee, he tends to get a small cookie or a scone as a pick me up and afternoon sugar high.  So, all in all, between the two coffees and an occasional treat, Ryan spends around $12.50 each workday. This expense does not account for the weekends during which he goes on caffeine run at least once spending another $5.00.

The Starbucks Fund Economics:

Let’s delve a little bit deep into the cost and benefits of the coffee expense.

The average cost of the coffee Ryan picks up is $3.78 with taxes, and generally, he rounds off the amount to an even $5.00.

Let’s make a couple of approximations and ignore the afternoon treat and look at the coffee expense.

The Starbucks fund calculation summary:

So, as you can see a monthly coffee expense of $250.00 may not seem much in today’s modern world. But when you look at how much the potential future savings can be, the numbers will become big and real rather quickly.

Essentially, most Americans, including millennials are not saving enough for retirement. Using Federal Reserve and other data, Magnify Money did an analysis to come up the savings for millennials.

In the case of Ryan, who has a crippling student loan, some credit card debt, an upcoming car replacement this could mean real different between drowning in debt versus getting even.  Of course, Ryan need not save and invest the coffee fund but making extra payments to the credit card debt may serve him well in the long-term.

“Do I pay $2.50 for a coffee? Never, never, never do I do that,” Kevin O’Leary tells CNBC. “That is such a waste of money for something that costs 20 cents. I never buy a frape-latte-blah-blah-blah-woof-woof-woof for $2.50.” Instead, he makes it at home. “I drink coffee, one cup every morning,” he explains. “It costs about 18 cents to make it, and I invest the rest.” 

But that is not so simple.  Let’s break down the entire coffee debate into respective talking points.

The arguments for continuing with the coffee habit:

• Each of us is a creature of habit and breaking the patterns that get us thus far is difficult and also may have negative consequences that we aren’t thinking.
• For most of us, a dose of caffeine in the morning eases us into the workday and makes us feel peppy and Zen at the same time.
• In today’s world where most of us are confined to cubicles or continually looking at a screen – phone or laptop, it is a social bonding experience worth the cost.
• Many a time, we go to a coffee shop with a colleague or a boss, and that can be very fruitful – general networking, gaining alignment and building influence.
• Some of the taste and flavor profile of specialty coffee is not easily replicable at home.
• We can’t become rich by cutting down to the bone.

Now, the arguments against this expensive habit:

• For some hot water, a dash of cream/milk, and powdered coffee beans, paying $5 is excessive.
• The social pressure of tipping on a $3.75 counter delivered product is very high. For example, if one round off to $5.00, it is about 33% tip – a rather high percentage for an everyday expense.  While 15% may be nominal and 20% may be reasonable for excellent service, most people are not going to whip out their pocket calculators and give a tip of $0.56.  (Please do not read this as to we are advocating stiffing the local service providers. Far from it. This post is a discussion on how on small bills the percentage amount of tips can be rather high.)
• One can have a reasonably good cup of coffee for less than a quarter and then using a thermos to-go flask also saves the environment from all the packaging material – the cup, the sleeve, the top, etc.  And in most workplaces, free coffee is still the norm.
• The savings – with a prudent and long-term investment strategy – are enormous and given how little Americans save for their retirement, the coffee fund can be quite substantial.

So, what’s the bottom line?

It is all about balance and how you prioritize your pursuits, habits, and savings based on your life and work goals and objectives.

For example, for someone coffee is a must have and cannot give up. But if that person brings lunch from home, isn’t she saving more on per meal ($12-15) than a coffee. You bet lunch costs more.

Or what about another person who may splurge on coffee, but watches movies by borrowing them from local library or streaming/renting from Netflix? Assuming they were going to the film 10-12 times with a family of four, the cost savings on tickets, popcorn, soda, and commute may add quite a bit.

Another case study is a fashionista who splurges on designer ware despite cutting corners on all other smaller expenses. Is the 15^th pair of shoes necessary? Or a metrosexual male who spends $150 on a haircut that still looks disheveled?

In other cases, if a person is a graduate of an ivy league law school and presently working as an associate in a white-shoe law firm, despite the student loans their career track is on pace to be rich and wealthy. So, in that case, the long-term career prospects and wealth creation opportunities may supersede the dollars and cents savings from everyday life.

It all comes down to are you doing things fully aware of the costs and benefits? Or are you doing it compulsively and as a creature of habit?

To calculate your coffee expense, get our Coffee Math or Starbucks fund excel spreadsheet. It is available free of charge to members (paid subscribers or free memberships or $1.99 for non-members.  It’s a good reason to sign up for a free membership.

You will be able to modify the template and use it for other related purposes such as the Pizza fund, beer and wine fund et al.

Note: While we are saying Starbucks fund, it can apply to any discretionary habit. So, for example, eating out lunch every day may qualify as an expense that you can lower – assuming there are cheaper alternatives.