You’ve heard this story before. If you just stop having a cup of coffee a day, ALL your financial problems disappear. Well, we at Gen Y Hustle pride ourselves at picking apart these lazy assertions and getting at the hidden truth. It takes a hustler to know a hustle.
Many financial planning sites throw around this intellectual exercise as if it were a knockout punch. Here’s how it goes: if you just stop buying a coffee a day and instead invest that money in the stock market, in 30 years you’ll be rich. It’s supposed to be a rallying cry for frugal living, as well as an ode to the power of compounding. If only people would stop spending capriciously ALL our problems would be solved. Here at Gen Y Hustle, we don’t fall prey to broad generalizations or one-size-fits-all solutions. Here we question EVERYTHING.
Let’s tackle this in parts. First off, it’s true that compounding interest is one of the strongest forces in the universe. It can make you a millionaire, or it can leave your grand-kids’ grand-kids paying off your debts. A dollar invested in the stock market will, assuming an average real return (after accounting for inflation) of 6% will double every 12 years. In 30 years, that dollar will turn into ten. So if you put $4.50 (the cost of a tall latte at my local Starbucks) per day for 30 years into an SP500 tracking ETF you would get about $87,700. Sounds cool right? Not quite.
Let’s talk about opportunity cost for a second. Opportunity cost is basically that which you could’ve gotten, had you not invested the $4.50. For example, the opportunity cost of buying a latte every day is $87,000. However, lets flip that on it’s head. What’s the opportunity cost of NOT having coffee every day?
For me, the consequences would be APOCALYPTIC. No coffee means my productivity is cut in HALF at work. Not to mention the legitimacy I lose from being “that guy who’s always yawning”. I NEED coffee. You could say that I don’t need Starbuck’s coffee. You can totally make Dunkin’ Donuts drip coffee at home. That’s probably gonna run you $0.30 per cup. That’s a massive savings right there. Why wouldn’t you do that? here’s why: Utility.
What’s utility? Utility is any benefit that you experience. Think of it like units of joy. That smell when you brew your favorite cup of coffee? That’s utility. It’s how we measure satisfaction from consuming something. What’s the point? That when you downgrade from that Starbucks latte to a Dunkin’ Donuts coffee, you’re giving up utility. That cup of coffee will give you LESS JOY. The question is then, is that JOY worth $4 a day to you?
You may be asking yourself, what’s the point? Isn’t this a blog about all the little ways we make our life more awesome? Wouldn’t skipping out on coffee in order to have a bigger piggy bank when we retire count as one of those little cheats? WRONG.
The “point” is, whenever you make a decision that involves a trade off like this (joy now vs joy later), you need to know what WINNING is for YOU. Frankly, if having an additional $87,700 when you retire is a game changer for you, you’re doing financial planning wrong. The utility you get from that extra $87,700 is minimal if you’re even moderately good at planning. The utility I get from that perfect cup of coffee every morning, however, is MASSIVE. My idea of winning is enjoying life NOW, as well as in the FUTURE. I don’t want to cheat future me of the safety and security that comes from a considerable nest egg. But I also don’t want to cheat CURRENT me from a life well lived because FUTURE me is a scared little baby. I love CURRENT ME. CURRENT ME is the best.
What’s the verdict?
Every purchase involves a calculus between utility now vs utility later. Some people go overboard and save 50%+ of their salary. More power to them. I’m not one of them. I’ll make my long term plans to ensure future me has enough to live off on. EVERY SINGLE DOLLAR ABOVE THAT is getting spent now. There are types of fun that can only be had in your 20s and 30s. You can’t travel as easily with 3 kids, you can’t eat out at all the fancy places (imagine a 3 year old eating tuna tar tar). You have to enjoy your youth while you still have it. It’s important to strike a ballance between the present and the future, but never forget that life was meant to be lived.