The Price vs. Cost of Non-Necessities

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 $5,00 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.