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The Price vs. Cost of Non-Necessities

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I visit Starbucks almost daily during the work week, sometimes even twice per day. I almost always buy drip coffee, in my only travel mug, and it comes to $2.47. I like everything about buying coffee. I like the coffee shop, I like the baristas, I like the smells, and I like the white noise of background chatter and people typing on their laptops. The coffee is tastier and hotter than that brewed in our office Keurig, and it gives me that tackle-the-workday jolt right before I set foot in the office.

But buying coffee every day is a wasteful habit, and it’s usually at the top of the things-to-axe-from-your-budget-to-become-instantly-rich. Most personal finance books tout that if you just give up your daily cup of joe, you’d become a gajillionaire in less than fifty years. Which is true, but they’re missing a very important point.

The price of a cup of coffee is the same for everyone. The cost is not.

We don’t charge people based on what they earn. A coffee at Starbucks costs $2.47 whether you’re bringing in $250,000 per year, or struggling to get by on $25,000. This is true of pretty much everything: your salary doesn’t determine what you pay for goods or services.

You’re making a choice with every dollar you spend: that what you’re buying right now is worth more than what the same dollar could buy in the future.

If I’m spending $1,000 on coffee in 2015, what I’m really saying is I don’t want the $1,276 that amount would be 5 years from now (assuming a 5% annual return). But this isn’t a simple equation. At first glance it seems crazy to pass up nearly $1,300 in 5 years for drip coffee today, but there are other factors at play:

  1. There’s no guarantee my money would earn a 5% annual return over those 5 years to compound to that larger sum.
  2. Inflation will eat into those returns. The cup of coffee I buy today is likely cheaper than the same cup next year.
  3. Perhaps most important question to ask is: am I getting more joy from spending $1,000 on coffee this year than I would on spending $1,276 on something else 5 years from now?

It’s difficult to imagine our future selves, because they’re strangers to us. This is one of the reasons it’s so challenging for people to save for retirement: they can’t actually picture themselves being old. We don’t know what our future selves’ priorities are, whether they’re struggling financially or totally secure. We don’t know their employment situation, or if they’re saving up for a big goal we haven’t even thought of yet. We probably know more about our co-worker’s or best friend’s finances than we do about our own, half a decade from now.

There is a balancing act between what we want right now and what we think we might want later, because you can never be totally sure you’re making the right choice. In my opinion, it’s in your best interest to err on the side of not screwing everything up for the future, while staying away from needlessly suffering on ramen and living in your car, but this is still my opinion. There’s higher earners with more frugal ways, and there’s lower earners ballin’ so hard I question their sanity.

How significant a dollar feels to you largely depends on how easy or difficult it is for you to get it.

Some people have to work really hard for $35,000 per year. Some people don’t have to do much for twice that. How easy or difficult it is for you to come by $2, or $10, or $1,000 will influence how you treat it. Someone earning more than $25/hr recoups the cost of a single cup of coffee in less than 5 minutes. Someone earning only $10/hr has to spend a quarter of an hour — probably actually longer than it will actually take them to drink said coffee — to recover the cost.

Thinking about my purchases in the context of how long it takes me to pay for them has never failed to provide a grounding perspective of what is rational to pay. I’m horrified by people that spend a year’s gross income on their wedding or a car. I don’t think people realize the time they’re pledging to afford the pricetag of items or experiences they want.

And therein might be a worthy measure of evaluating your purchases: if it takes you less time to consume what you’ve bought than it does in order to earn the money to purchase it, it’s probably a bad buy. This isn’t rocket science. If it takes you longer to earn your money than it does to spend it, you will never be rich. Hopefully this gives you pause before your next dinner out or concert ticket. For those with money, it might be easy come easy go. For those without, you know “easy” never enters into the equation.

If someone else earns $100,000 how should they live? What should they save? If they want to be on par with the $35,000 earner, then they should divide their income proportionately. That’s why those percentage budget pies are so great, they put everyone one equal ground. But they are not equal. $100,000 still buys more than $35,000, no matter how you cut it. The high-earner with can buy more, or buy better, than the low-earner, even if they divvy up their budget percentage-wise. There are plenty of people out there who will always try to spend every penny they make. As their incomes increase, they will discover new luxury things they absolutely need to own, and they file these purchases neatly under the categories of “housing” and “transportation”, staying within the suggestions of the budget percentage pie. This is called “lifestyle inflation”, and it means never getting ahead no matter how fast you run.

But the concept of “lifestyle inflation” neglects the fact that there are some things that will not scale up.

The high-earner probably lives in a bigger house and drives a nicer car than the low earner, but they probably do not consume 3x the amount of coffee. This is where the “wasteful spending” equation breaks down.  If both our high-earner and low-earner allocate 5% of their budget to permissible wasteful spending, the low earner is only going to part with $1,750 whereas the high-earner has $5,000 to blow. Now, I don’t know what you think, but personally I feel like $5,000 is a lot more fun to spend than $1,750. You can get more things, or better things, or both. The low earner can’t really keep up, even if they try.

RELATED: Your ability to be frugal is limited, your earning potential is not

This is why I always advocate increasing your income before cutting your budget. It seems harder, because you have to get creative or work more, but fundamentally it’s easier. Personally I think everyone should strive to get to the point where a latte doesn’t lead to derailment of their financial future. 

Whether or not you consider coffee, or any other frivolous purchase, important is totally up to you. Would skipping the cafe on my morning commute make me a gajillionaire in some number of years? Maybe, but the truth is I’m going to hit my financial goals anyway. And that’s the real luxury of being able to afford to purchase non-necessities of any type or price: not worrying about how they affect your bottom line — because they don’t.


25 Comments

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  1. I love this post for two reasons.
    1. I quit my ($50k) job a couple years ago as I was experiencing workplace bullying to start working in a shop for minimum wage on 20hrs/wk. I went out for cocktails with some former colleagues. Prior to quitting I would have easily paid $17 for a cocktail, but on reflection when I looked at the menu I realized that each cocktail equated to TWO HOURS of work for me. It wasn’t worth it and I stuck to water. Now I’m happily in a better job earning more than minimum wage and a $17 cocktail is still crazy to me, but I wouldn’t be out of pocket.

    2. I’m reading a book at the moment called ‘Stumbling On Happiness’ where he talks about how we don’t know what would make our future selves happy even though we think we do…

    Reply
    • Bridget (Author)

      I love the time = money equation for understanding my budget. Putting everything in context of hours worked (or to be worked!) makes the real cost clear.

      It’s been one of the biggest struggles of my MBA. I knowingly went in thinking “I will tread water during, and 2-3 years after this program before I start to reap the rewards”. Of course, actually doing is different than planning to do… I generally find everything is harder and more expensive in practice haha.

      Reply
    • Loved Stumbling On Happiness. Great book.

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  2. “How significant a dollar feels to you largely depends on how easy or difficult it is for you to get it.” = YES!

    This is what I’m struggling with at the moment, being under-employed. When I worked at the college, a $3 was nothing because I’d still be getting paid $5+ for that15 minute break. Now that I’m only working PT for min. wage, a $3 coffee on my 15 minute break means I lost $0.50+. (Probably more, because I’m not getting FT hours.) I simply can’t afford take-out coffee anymore, so I don’t buy it.

    Some people don’t understand that because “it’s only $2 – surely you can afford that!”. No – I can’t. A latte a day (or even a few times per week) means I can’t afford to put gas in my car. (I mean, I cut my own hair yesterday because I can’t even afford a $40 hair cut at the moment!)

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    • Bridget (Author)

      Everything is relative. You can only afford what proportionately makes sense to your income — and our incomes change throughout our lifetime. I’m in a totally different place than I was a year ago, and my spending reflects that!

      Reply
  3. I love this post! Things that seem minuscule to others are things that I have to think twice about buying, based on my inconsistent income and saving for a house and a wedding.
    I totally agreeing that increasing your income is easier than cutting your budget. I just took on another job to do just that :)

    Reply
    • Bridget (Author)

      Props! All about the extra income over budget cutting — because it’s way easier to comfortably say yes than to uncomfortably say no to spending.

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  4. SP

    Very true.

    It is important to me to take a look at my overall budget and spending, and to make sure it tracks with my values and that I’m really getting the joy out of my coffee/whatever that I think I am. At some point, luxuries can just become habits – and this is fine as long as this is a conscious decision and I still think it is worth it.

    Reply
    • Bridget (Author)

      agreed!

      I might be too far into the habit side than luxury. I even thought today, “I am going to go five days without Starbucks” but then my coworker and I went this afternoon… so the new goal is four days =p

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  5. Love this post! It is true that coffee is a needless expense for some people and I’ve always advocated changing that habit for people on a strict budget. At the same time, I used to buy my coffee from a coffee shop every morning, and I never felt bad about it. I love coffee. It helps me enjoy my work day. And because of my other good choices (bringing lunch vs. buying it, etc) it’s not a financial burden.

    That said, over the past year, I’ve converted into an at-home brewer and it has been life-changing. The coffee I make in my french press at home is infinitely better than anything you could get Starbucks. Just sayin’!

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  6. Barry @ Moneywehave

    A lot of personal finance blogers get caught up in the whole “latte factor”, but personally I don’t think it matters what you drink as long as you’re meeting savings goals. Seriously, as long as you don’t overspend on a house, car payments, or on your credit cards, who cares how many coffees you buy.

    Reply
    • Bridget (Author)

      EXACTLY!

      That’s why I’ve always been in the camp of you should maybe try to decrease your rent or axe your car payment and save $300+ per month before you pat yourself on the back for skipping coffee a few times per week =p

      I think people like the latte factor because it’s easy to understand and helps them visualize where their money is going, but at the end of the day it’s pretty small.

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  7. Jaye

    I’m more aware of what I’m spending now more than ever. I used to spend $10 or so on buying lunch and a coffee 5 days a week – a total of $50. Now I pack my own lunch and bring my own coffee. I shout myself a meal out and a coffee each weekend which might cost $20 or less. Still, I’m saving $30 a week and I look forward to it more, as I normally meet up with friends so it feels like the money is more well spent (as opposed to eating / drinking in isolation in my lunch hour).

    Something that really hit home though was just how significant $1 can be to others.

    My good friend recently had the flu and couldn’t afford to buy staples (Panadol, throat lozenges, extra tissues, pay to see a doctor) so I spent near $70 on those basic items for him because he wouldn’t have been able to pay that weeks rent if he bought them.

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  8. Ursula

    I did something similar to calculating how long it’ll take me to make that $ I’m about to spend – however I calculated my ‘take home’ which **doesn’t** include taxes and automated 401k, other savings, etc, which I don’t get to touch for a long time, therefore it doesn’t exist to me **now**.

    This way my hourly wage is less half than what I’m technically getting paid. It has been a great deterrent from mindlessly spending money on random and not so random things.

    At work, I’ve brought a box of my favorite teas, stopped drinking takeout coffee several times a day, and started to pack my lunches. Every time I bring my lunch, I transfer $10 (avg cost) from checking to Digit (J.Money – thanks for the tip), then when that builds up to $100 (and that happens pretty fast), transfer it over to Betterment. One thing I haven’t stopped is actually going outside for a walk during the day, even if I’m not going to get coffee/food – that is free, and brings a lot of joy.

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  9. As I get closer to retirement, and leaving my FT job, expenses are key. I am squirreling away as much as I can, in anticipation of future needs.

    And I agree, $5k is a lot more fun than $1.75K.

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  10. Such a great and often overlooked point- price vs. cost depends on your circumstances.

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  11. I think this is particularly important when you consider costs that aren’t necessary, but are time savers. Having a housekeeper come twice a month seems like a prime example. If you make $35k a year this is a huge luxury and you may be spending more per hour on the housekeeper than you make yourself.

    But if you earn $150k, that $20/hr maid seems like a pretty good deal to get back 1/2 your weekend from cleaning, particularly if it frees you up for your side hustle.

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  12. Probably the best post I’ve read this month. Though I’m really trying to cut down on the number of bloggers I follow, welcome to the blog roll. Looking forward to reading more.

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  13. I love this! I don’t know why all personal bloggers/books hate on the latte. “Perhaps most important question to ask is: am I getting more joy from spending $1,000 on coffee this year than I would on spending $1,276 on something else 5 years from now?”

    That’s what everyone should ask themselves.
    I had a friend that gets a manicure every week. She calculated she was spending $800 on manicures a year. She said if someone asked her for that $800 upfront for weekly manicures, she would say yes, because for her, weekly manicures are WORTH $800.

    Worth it because:
    1. She’s not going into debt because of it
    2. $800 can’t buy that much
    2. She would rather spend $800 on manicures, then on 3 new pairs of shoes or have it in her savings account

    I believe in being frugal, obviously, but I also believe that everyone has that “latte” cost, whether it be manicures or blowouts or sushi, that small daily or weekly pleasure that is worth the cost, as long as you aren’t in debt and are meeting your savings goal.

    Sure cutting it out would give you more money over a period of time to save, but you have to spend money on SOMETHING, and we should support people’s choice on what to spend it on, even if some people think that purchase is frivilous or a waste of money. It’s not a waste of money if it’s a concious choice.

    Maybe I will write a blog post on this too lol.
    ~Danielle

    http://Www.prettylittlepoorgirl.com

    Reply
  14. passionatelysimple79

    Awesome post!!! This is something my bf and I are always battling about. Reason being is (as a waitress) I usually wait until the weekend to treat myself to something along those lines. It’s usually been a long hard day with tough customers but also, those $4 aren’t as hard to part with because there are a lot more from where those came from. During the week, those couple dollars are much more crucial and harder to earn.

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  15. Interesting post. I almost never buy coffee out, mostly because it just doesn’t taste THAT much better than a cup that I brew at home. Most of it is in our minds. We enjoy the experience of grabbing a cup of Joe at our favorite coffee place, and therefore, it just tastes better.

    But the comparison between “price” and “cost” is an excellent one. Product prices don’t work like taxation in this country. They are progressive. Everything we buy costs the same regardless of how much money we make. That is an important element to keep in mind that I don’t believe many people (including myself before I read this post) ever consider.

    You made me think, dang it! :)

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  16. seattlegirluw

    I’m a little late to the game, but this is a really interesting point. I’ve definitely gotten a little more lax as our income increased. (Used to be we were living on $3,000/month and paying down medical/student debt.)

    It’s just not as big a deal these days if I spend $5 for something. That said, I want to get back into that mindset — partially, anyway — so that we can ramp up our savings.

    Reply
    • Bridget (Author)

      I’ve been thinking about that too… I couldn’t believe how crazy frugal I was to pay off my debt, and now I just think, “If I adopted that mentality now, I could catch up on lost TFSA/RRSP room in record time”

      Reply