Don’t Buy that Cup of Coffee
What would happen if you invested it instead?
As a college student, I probably drink far too much coffee. I study in coffee shops, socialize with friends in coffee shops, and often meet mentors or co-workers in coffee shops. Because of this, a good portion of my money goes to buying a cup of coffee each day.
Anyone who is familiar with finance and the rule of compounding likely knows where this story is going. That small amount that I’m spending each day — $3, let’s say — would grow exponentially if I invested it into a mutual fund.
This concept is now known as the “latte factor,” thanks to a tremendously popular book by the financial author David Bach. There’s even a website where you can calculate the potential earnings of incremental investments.
Let’s go back to my example. If I took the $3 I spend daily on a cup of coffee and put it into a mutual fund that earns an average of 7% a year, I would only have $1,130.20 after one year. That’s $1,094.40 and $35.80 interest on the investment.
But I don’t plan on living for just one more year. What if I continue to invest $3 a day into the same mutual fund for 60 more years?
I would then have $1,014,313.86. That’s $65,664 that I would spend on coffee and $948,649.86 in accumulated interest…
