Think on the margin.
Earlier this month CNBC generated an outrage cycle about money advice by tweeting this story, in which the personal finance professional Suze Orman claimed that buying coffee means “you are peeing $1 million down the drain as you are drinking that coffee.” (Even the legendary writer Susan Orlean weighed in.) Earlier this summer, USA Today generated a similar negative buzz when it published an article from the money website The Motley Fool that claimed Americans waste an average of $18,000 a year on “nonessential items,” which they said included personal grooming, gym memberships, restaurants, coffee and lunch. These are all on top of similarly shaming articles that tell us we’re not rich because we sleep in and travel; because we buy shoes and jeans; and, of course, because we buy too much coffee.
While it is true that every one of us — including yours truly — can and should be smarter about spending, these small, sometimes necessary purchases are a just a sliver of a much wider story about our struggles with money that, in large part, can be traced back to the Great Recession, the debt load for younger Americans and broader trends about wage stagnation.
This is from Tim Herrera, “Here’s Some Money Advice: Just Buy the Coffee,” New York Times, June 23, 2019.
Herrera then writes:
So, no, your coffee habit is not the reason you aren’t a millionaire,nor are the haircuts you get or the gym membership you have. But how can we improve our financial situation when we’re being shamed for enjoying a latte? Who can we trust? Is the advice we’re reading truly advice or is it meant to sell us something? It’s a mess!
He’s almost certainly right. It’s not the reason; nor are expensive haircuts and gym memberships the reason. But together they add up to an important part of the reason, and it’s an important part of the reason, not that you aren’t a millionaire, but that you’re substantially less likely than otherwise to become a millionaire. Follow those habits–daily Starbuck’s and sometime twice-daily Starbuck’s plus expensive haircuts every month plus expensive gym memberships (notice that all of these are almost certainly not tax-deductible)–and you’ll make it harder for yourself to become a millionaire if you’re 30 now and want to be a millionaire by the time you’re 60.
Herrera then reports on an interview he did with Tara Siegel Bernard, a personal finance reporter with the New York Times. Here’s part of it:
Tim Herrera: So I feel like we’re in this weird bubble where a lot of personal finance advice is centered around tiny expenses, like coffee, snacks, occasional lunches or other small indulges. I hate it! Those are usually the things that make life worth living! So I’ll start with the question we’re all wondering: Will skipping coffee make me a millionaire?
Tara Siegel Bernard: The short answer: no. It’s silly. It’s a superficial way to get at the “needs versus wants” question, but it’s not a particularly smart one. Or maybe it’s just easier to blame people for overspending on coffee because it’s a lot more difficult to give advice on the many things they cannot control: wages not keeping pace with the cost of living, the high cost of health insurance, housing, child care, paying for college, etc. But … coffee! You can control the coffee!
It’s not silly at all. Moreover, although some people may be talking about blame but when I talked to my students about this, I was trying to help them think through their finances: there was not a hint of blame.
Interestingly also, Ms. Bernard then goes on to list some of the things she thinks people can’t control. Let’s look at those one by one. Her first example is of wages not keeping pace with the cost of living. There are two sides to this. First, wages. Lots of people, if they think about it, can do something about wages, certainly in the long run. The cost of living is something one can do a lot about. And it’s weird to see her list it in this context. Aren’t expenditures on coffee part of the high cost of living? Score one for her on the high cost of health insurance. (And, for many people, we can thank President Obama and a Democratic Congress for that.) On child care, once you have children, you’re stuck with the issue, but, especially in this era of easily available contraceptives and legality of abortion, the choice to have a child is, for the vast majority of people, a choice. Housing? Governments, by restricting supply, especially on the two U.S. coasts, have made it much more expensive, but it’s still possible to move–or to get a roommate. And paying for college? You have lots of choices. You can get your Associate’s degree at a community college in 2 years by paying a fairly low tuition and then go to a state school for 2 or 2.5 years to finish the degree.
To her credit, Ms. Bernard does go on to admit that we have choices about two of these things, namely housing and cars:
All of that said, we should try to be thoughtful about spending. We’re constantly making choices and trade-offs that affect our financial and emotional well-being. Should I pay more for housing so I can live closer to work and spend less time on the train and more time with family and friends? Or should I pay less for a home but increase my commuting stress? Those types of financial decisions — how much house to buy, for example, or buying a more economical car — will go a lot further than agonizing over lattes.
Notice, though, how she exaggerates about coffee with her idea of “agonizing over lattes.” Who was advocating that we agonize?
A better approach is to think on the margin. Let’s say you buy 10 grande lattes a week at Starbuck’s. At a price of $4 including tips (which is why a friend calls it “Fourbucks), that’s $40 a week. For 50 weeks that’s $2,000.
You love your lattes. But you could do what I did when I discovered the Starbuck’s mocha. You could make it a treat that you indulge in twice a week. You then save $32 a week. Over 50 weeks, that’s $1,600. (I know that there are 52 weeks in a year; I’m allowing for times when you might want to indulge a little more.)
Do that for 10 years and invest the savings in Vanguard Total Market Index and the odds are high that at the end you won’t have just $16,000. The odds are quite good that you’ll have about $25,000.
Then maybe you’re in better shape financially at the of 10 years and you can have 4 lattes a week. Then you save $1,200 a year compared to following your 10 latte a week habit. Moreover, you’re letting that first $25,000 ride for another decade or two. Compounding, dontcha know?
I’ve written about how to become a millionaire here.
READER COMMENTS
Mark Z
Jun 30 2019 at 1:23am
This reasoning clearly seems like a logical fallacy. If I make 20 small ~$5 purchases per day, that adds up $36,000 per year, which will likely dwarf more inevitable costs like rent, utilities, and transportation combined. Of course any one of those 20 small purchases is trivial. That doesn’t mean those small purchases, as a class, are trivial; they may make up the vast majority of one’s expenses. The sum of many small expenses is not necessarily itself a small expense.
With small purchases, though, it’s more a matter of general habit than a single conscious decision. Choosing a $600 a month studio apartment over an $800 one bedroom, or choosing a Honda Civic over a Chevy suburban are certainly cost-saving decisions, but the financial benefits may be rivaled by cutting one’s daily ‘incidental’ expenses in half by, say, cutting in half the number of meals for which one eats out, the number of cups of coffee, the number of drinks one has, etc. But changing one’s habits are harder than making a single, big cost-saving decision, which is perhaps why people are more diligent in rationalizing ‘habitual’ costs.
Benjamin Cole
Jun 30 2019 at 8:08am
I always lived frugally and tried to drill it into my kids and wife.
Let me tell you, I have flopped.
They say parenting by example is the most effective method. I am afraid to ask what are the less-effective methods.
Matthias Görgens
Jun 30 2019 at 10:46am
Parenting by genetics is the most effective method.
Benjamin Cole
Jun 30 2019 at 8:10pm
Perhaps you are implying I am not the father of my kids.
Mattb
Jul 1 2019 at 11:14am
I believe Matthias is making a case for the Nature side in the Nature vs. Nurture debate. If most of how your kids turn it depends on Nature (aka genetics) then you don’t have to worry about leading by example or other parenting techniques as they won’t matter anyway.
Elisha Ben Yaakov
Jun 30 2019 at 10:43am
I would say the critical difference between why I became a millionaire in my early thirties and many of my similarly-aged coworkers did not is exactly the frugal mindset to not spend on expensive haircuts, concerts, and single-resident housing.
Unfortunate that their happiness hinges upon such petty things that drain you of your resources (thus happiness now reduces happiness later). If their happiness hinged upon friendship, family, and productive hobbies, then they’d have so much more happiness (and happiness now would increase happiness later).
BC
Jun 30 2019 at 11:22am
“And paying for college? You have lots of choices. You can get your Associate’s degree at a community college in 2 years by paying a fairly low tuition and then go to a state school for 2 or 2.5 years to finish the degree.”
You could also enlist in the military and go to school on the GI Bill. I am surprised how infrequently this option is mentioned when discussing paying for college. Surprised, because this is one of the few options that would seem to be almost universally available, regardless of family financial status, at least for able-bodied persons, and it has been around for many decades. Yet, the various proposals for expanding college financial aid today don’t seem to be narrowly targeted at only those ineligible for military service, i.e., those that don’t already have at least one viable option for paying for college.
Phil
Jun 30 2019 at 5:16pm
BC – military service is not “almost universally available.” More than 2/3 of the youth in America are ineligible to serve because of the military’s thresholds for educational, behavioral, and physical status.
Mark Barbieri
Jun 30 2019 at 12:32pm
David – your 10 year projection understates the long term potential. If you assume a monthly return of 0.5% (just over 6% annual – not an unreasonable estimate after-inflation growth rate) and a $133.33/month investment rate ($1,600 per year) and you invest that money steadily over a 35 year career, you end up with about $190,000. It all adds up.
I had the blessing of a neighbor that sat down and mapped out compound interest curves with me, showing my how my money would grow if I saved money every month and how my debts would grow if I borrowed money every month. He stressed that it wasn’t really a huge difference month-to-month but that the difference grew huge over time. It was up to me, he said, to decide which side of that line I wanted to live on.
I talk to lots of people that are living paycheck-to-paycheck, unable to save because the “high cost of living”. They aren’t just drinking Starbucks regularly. They spend a lot of money on alcohol. They drive nice cars. They buy $1,000 phones every other year. They eat out a lot. The spend money on all sorts of luxury goods, but because all of their peers are doing the same, they seem to think it’s just part of the cost of living a normal life.
The younger ones often complain that it’s harder today becomes income haven’t risen in 40 years. First, that should mean that, while saving isn’t easier, it isn’t harder either. And it’s obviously wrong. I ask them to compare their lives with my age equivalent life – cars that are faster, more fuel efficient, and safer; much greater entertainment options; communications options that were science fiction when I was younger; bigger homes for smaller families, etc. The notion that the typical person today isn’t much better off than the typical person was 40 years ago in this country doesn’t even pass the laugh test.
john hare
Jun 30 2019 at 5:31pm
It shouldn’t pass the laugh test, but all too many people are convinced that they are worse off. “I could get a new car for X$ back when.” Conveniently forgetting that wages were ?/X$ back when and the car wouldn’t see 100,00 miles without an engine overhaul . Mobile homes were a step up for many back when, they often had air conditioning.
Weir
Jun 30 2019 at 7:25pm
“The younger ones often complain that it’s harder today becomes income haven’t risen in 40 years. First, that should mean that, while saving isn’t easier, it isn’t harder either.”
For a down payment, it’s harder.
Real estate in Vancouver now costs 12.6 times the average annual household income.
In Sydney, 11.7 times.
In Los Angeles, 9.2 times.
In Auckland, 9 times.
In London, 8.3 times.
And smaller families are one of the consequences. Smaller families, no families, delayed marriage, no marriage.
Benjamin Cole
Jun 30 2019 at 8:16pm
Housing has become a killer. For any average guy working in the cities you just mentioned, buying a house is not a prospect, ever.
So, how should one feel about rent control, when there is an institutionalized, legal, revered, petrified system of economic rents (enforced through restritive property zoning) in housing markets?
Brandon Berg
Jun 30 2019 at 3:12pm
It’s always worth repeating that claims that (median) wages aren’t keeping up with inflation are based on the CPI, an index that is known to be invalid for this purpose due to substitution bias. When adjusted by s chain-type deflator like PCE, we see that median wages have indeed substantially outpaced inflation.
That aside, there’s an implied double-counting in listing stagnating wages and high cost of living as separate issues. If real wages are stagnant (they’re not, but let’s pretend), that means that they’re growing at the same rate as cost of living. In this situation, you can say that wages are stagnant, or you can say that cost of living is rising too quickly, but if you both of these things, it implies that real wages are falling, which simply isn’t true.
Weir
Jul 1 2019 at 3:51am
According to data from Microsoft, median household income rose in Seattle by 34% from 2011 to 2018, and median home prices by 96%.
Philo
Jun 30 2019 at 4:29pm
When you talk to young students about lifestyle choices and personal finances, there can be no suggestion of blaming them, because you are recommending prospective actions, future actions, actions which have not yet been taken. Perhaps hypothetical blame is looming in the background, if they reject your advice and that causes them to fall short of a level of wealth that they strongly desire. Perhaps there is also in the background a suggestion of actual blame of older people who acted contrary to your advice and consequently failed to achieve such a level. But, of course, there is no explicit blame of anyone.
Even these hints of hypothetical blame are pretty faint. Saying that a certain person did not do a certain action at a certain time, and that this caused a certain desirable circumstance not to come to obtain at some later time, is not in itself blaming the person for not doing the action.
Phil
Jun 30 2019 at 5:09pm
I have authored two self-help books. Not published, but authored, because they are so simple no one would publish them.
Weight loss book: Eat better, move more.
Financial security book: Live beneath your means.
All this nonsense about coffee complicates things unnecessarily.
GL
Jul 2 2019 at 11:41am
Couldn’t agree more. The quantity of literature on diet and weight loss is truly stunning. I typically say “eat less, move more”, but your “eat better” is probably more apt. In any case, the whole thing boils down to less than a dozen words. No need to quibble over sugar vs fat vs carbs vs xxxx. All that food science occurs on the margins of the substantive choices.
Finance is slightly more complicated, although at most a dozen sentences. In short, don’t seek to beat the market, don’t wait until you have a “substantive” amount to save. Put away a little bit, do it often, do it early, and rely on low cost index funds.
I ask myself regularly, does this support my physical/financial health? I break the rules often, but follow them in general, to my enduring happiness and health.
Daniel Hill
Jul 1 2019 at 2:22am
Buying coffee at Starbucks is representative of people spending money thoughtlessly and then complaining they can’t get ahead. Eating out instead of cooking at home. Buying the latest iPhone instead of a perfectly good Android phone (or even the not quite latest iPhone). Changing their high end car every two to three years. Living in a expensive city when they aren’t part of the high-paying industries driving housing prices there instead of moving somewhere more affordable.
If those things truly make you happy, then great. But everything in life is a trade-off. Adults make choices and live with them, they don’t constantly whine like little children about it.
Weir
Jul 1 2019 at 3:47am
“Oregon adopted widely hailed ‘smart growth’ policies in the 1970s, imposing ‘urban growth boundaries’ around cities to prevent sprawl. The boundaries are supposed to include enough land to allow for years of additional growth, but local governments have been needlessly restrictive. This has artificially inflated the price of land within the boundaries. In 2010 consultant Wendell Cox surveyed the Portland urban growth boundary’s effect on property values. Land just outside the boundary was worth $16,000 an acre, versus $180,000 an acre for land ‘virtually across the street.'” That’s from the Wall Street Journal.
At a time when Portland’s population grew by 64,000, legislation extended its boundary a mere 5,500 acres.
And in Bend when population grew by 75,000 people, legislation added a mere 3,400 acres to its boundary.
That’s some really expensive legislation. That’s thoughtless legislation and even millionaires are going to need the services of low-paid nurses and baristas. Somebody’s got to clean the rich guy’s car, and you just know the rich guy’s going to whine if he has to wait for cleaners to schlep all the way in from the boondocks.
Legislating them out of the city limits isn’t a smart long-term plan for people who rely on their services.
RPLong
Jul 1 2019 at 9:39am
Sometimes convincing people to make better choices is more a matter of phrasing it in a way to which they’re receptive.
For example, I, too, am someone who derives great pleasure from a fancy latte in the morning. That might make me a bit frivolous, but it doesn’t have to make me less frugal. I’ve opted to make my lattes at home. I buy my coffee in bulk, grind it in a small electric grinder, and make my espresso in a $10 rangetop espresso percolator. I drink two fancy lattes every morning for breakfast, for pennies on the dollar of what I’d pay at Starbucks. When I’m entertaining guests, they love it when I make one for each of them, and I can make a whole houseful of guests a latte, one for each of them, for less than what I’d pay for a single latte at Starbucks.
You don’t have to give up nice things or live an ascetic existence to save money. You just have to avoid doing dumb things like spending $4 on a latte that should cost you pennies, paying $2 at a restaurant for a teabag and a cup of hot water, paying $5 for a hamburger you could easily rival by cooking it at home, and so on. Even an expensive bottle of cognac is a more frugal purchase than buying cheap cognac a glass at a time at a bar.
I get the feeling that people like Herrera don’t realize that saving money isn’t about giving up what you love, it’s about being wise about how you purchase “the things that make life worth living.”
David Henderson
Jul 1 2019 at 10:34am
Very nicely put. In important ways, it’s better than my original post.
David Seltzer
Jul 1 2019 at 6:12pm
Nice article. I’m very comfortably retired so my “utils” of satisfaction come from daily consumption of Starbucks tall Americanos priced at nearly three bucks a pop. Of course the numbers come to $1095 per annum. But, for that low price, I meet, daily, an eclectic group of really interesting people who are curious, skeptical and thoroughly engaging. Those Americanos are the catalyst for congenial social interaction.
Dan Quixote
Jul 1 2019 at 9:42pm
A few months ago JP Morgan Chase posted a tweet representing an exchange between a customer and his/her bank account. The customer asks why their balance is so low and the bank account replies, “make coffee at home; eat the food that’s already in the fridge; you don’t need a cab, it’s only three blocks.”
It was meant as “Monday motivation” but it provoked everyday outrage (the kind endemic to Twitter). Sen. Warren joined the dog pile and blamed the bailouts of the Great Recession and stingy employers who don’t pay “living wages” (wages of course being determined by the benevolence or greed of the employer in question, or according to the whimsy of their moods). The tweet was deleted within hours.
But that’s the world we live in today. Nobody can do anything about their situation and it’s all someone else’s fault. Indeed, we are entitled to both our lattes and a gold plated retirement, and its up to the government to make sure we get it. That is at least a prevalent point of view. J.P. Morgan is right, but being right appears to carry much less weight today than being patronizing and indulgent (though wrong). We have gone from let them eat cake to let them eat pabulum.
Chris
Jul 2 2019 at 10:37am
First, I don’t think it’s as binary as many posters seem to: you can increase your wealth by making better daily choices AND still take issue with the many less controllable factors. There may be a lot of money to be saved by not getting the daily starbucks, however it really is a drop in the bucket compared to, say the increase in my daughter’s daycare cost this year compared to last.
As to David’s list of ‘actually controllable costs’, you are proposing that I become a millionaire by not having children, moving out of the city to a location where housing costs less, attending community college, and voting republican so I can get better healthcare. The end result of that would have a huge economic impact as children often provide social and financial help to adults when they get older, living in the city opens up many job prospects and gives access to increased wages, community college limits access to many higher wage professions, and republican politicians regularly enact policies that transfer wealth to the wealthy. If your proposal was true, then the countryside would be filled with millionaires.