Are You Spending $1.5 Million on Coffee?
Breaking Down The True Cost of Compound Interest, and Coffee…
So let’s break it down. The average cost of a cup of coffee in North America is estimated at roughly $3. Assuming you purchase a single cup of coffee a day over a period of 50 years (disregarding inflation), you would have spent approximately $54,750. Doesn’t sound too bad, does it? But now, let’s compare that with the opportunity cost of investing that $3 (or $21 weekly) over a period of 50 years at the average market return. Crunch the numbers this time and the difference is a whopping $1.5 million dollars!
Now, I am not suggesting that you start feeling guilty every time you spend a few dollars on a coffee… or anything for that matter. After all, we all need to live a little and have a reasonable sense of enjoyment along the way. However, the point of this post is to draw your attention to the power of compound interest.
Compound interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t… pays it. — Albert Einstein
If $3 a day can make you a millionaire (and I know 50 years is a long time, perhaps seemingly a little too dramatic)… think about what a few dollars saved every week can do for you over the long-term. The key here is to make sure that your savings are being invested and that your returns are being continuously compounded, meaning that your returns keep growing year over year without taking any profits. Saving your money in cash simply won’t work, you’ll be leaving too much on the table, a few million dollars that is.
Allow me to demonstrate with two case scenarios:
- $50 a week invested from age 25–65 at the average market rate = $1.37M
Your total contributions in this first case amount to $101,450 (blue) but the total value of your investment would $1,374,601 (blue + green).
- $100 a week invested from age 35–65 at the average market rate = ~$1M
Your total contributions in this first case amount to $150,900 (blue) but the total value of your investment would $982,679 (blue + green).
When it comes to compounding, time is your best friend. Start now and I promise you, if you remain consistent and patient over time, with little to no effort whatsoever, you will easily build a significant nest egg over the long term.
Okay, time for a fresh pot, happy compounding!
Assumptions:
- 10% annual return on investment over the long-term
- Investing in index funds with no fees
Please follow me and stay tuned if you would like to read my upcoming post on investing in index funds.
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