Every time I see a person on the street drinking an overpriced ‘to-go coffee’, I am looking at what could have been a millionaire.
Over time those daily coffees will amount to lots of money, but that is not everything. Every dollar spent on a ‘to go coffee’ is a dollar that can not be invested and generate interest.
Because of compound interest, this can become a lot of money over time. If you are already a personal finance expert, this is no news to you (although the forces of compound interest are always a good reminder!), but if you aren’t, this might be an eye-opener.
The eighth wonder of the world: Compound interest
Albert Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … He who doesn’t … pays it”
If you buy a daily, overpriced coffee, you might be part of the latter group.
Compound interest works wonders over time. Not only do you generate interest on the money you have saved, but you also generate interest on that interest, and interest on that interest, and… you get it!
Compound interest is like a snowball rolling down a hill that just grows bigger and bigger.
As long as you keep on investing and do not fall for the temptation on cashing in on your investments, you are in for a ride.
Let’s do the math of how rich you can become by skipping your daily Starbucks (or any other overpriced) coffee:
How to become a millionaire by skipping overpriced coffee
Let’s assume you are 20 years old (if you are older, don’t worry, this example applies to you as well).
At the time of writing, Venti Caffe Latte and a croissant at Starbucks costs $4.15 and $2.45 respectively in the US.
If you buy a daily cup of coffee and a croissant, this will amount to $2,409 per year. Not really a millionaire yet, huh?
But what happens if you invest the money once a year instead of just placing them in a savings account?
Let’s assume that you generate 6% in return on your investments after tax and inflation (this is what I usually count on, but you might be more optimistic or pessimistic).
After two years (two years of saving, and one year of generating returns), you will have $4,963 compared to just two years of savings with no returns at $4,818. Having invested for just one year, you have already made $145 more than if you had not invested (and saved up $4,964 by the end of age 21).
Still not a millionaire? I know, but you are only just turning 22 – you need to be patient!
Let’s try to look a bit further into the future if you continue saving on the coffee.
You will become a millionaire by age 75 if you decide to skip your daily Caffe Latte and croissant. Not too bad for such a small thing, right?
I know you might want to be a millionaire before age 75, so hopefully you have also saved and invested more money than just your daily coffee. Remember that we are only talking about saving roughly $6 per day, which can make you a millionaire within a lifetime.
If you had only saved the money, but not invested them, you would have had $134,904 by age 75. Quite far from a million dollars, but still a lot of money!
Imagine if you could find other smaller daily/weekly/monthly purchases to skip and invest the savings, you would be able to do become a millionaire much faster than this.
As you will see in the table, it is first after a while that things really take off for your investments.
It takes you 55 years to become a millionaire by skipping your daily coffee and croissant. However, in the example you generate more than 25% of your entire fortune from age 70 to 75, because the compound interest really gets to work.
In the next 25 years until you are 100 years old, you will make $3.5 millions more. So it took you 55 years to generate the first million, but only 25 years to generate the next 3.5 millions?
This is the magic of compound interest! As soon as you have accumulated a large amount of money, you will also generate larger returns. If you are in it for the long haul, compound interest will work wonders for you.
That is how you become a millionaire by skipping your daily coffee and croissant!
What other things could you possibly skip that could make you become a millionaire even faster?
Be sure to check out my early retirement calculator – it shows you when you can stop working depending on how much money you can save yearly.