I was recently interviewed for a piece on CTV around a recent study that states that more than 40% of millennials spend more on coffee than on retirement. For 18 to 23 year olds, that stat jumps up to 50%.
Now I might have not been the greatest person to interview for this piece, because I probably spend a grand total of about $20 on coffee per year – I don’t drink the stuff unless I’m a zombie from lack of sleep. But I’ve attempted to unbiasedly break down why there’s still hope for millennials, even if they are putting more towards coffee than their retirement right now.
Let’s think about someone who is currently 18 to 23 years old for a minute. They’re probably still in university or college, working on projects and studying until all hours of the night and then waking up to go to early morning classes. They’re just trying to stay awake and get through school so they can get a good job when they’re done. They’re not thinking about retirement yet, and that’s okay! I’m not worried about them.
That’s about the same percentage of millennials who spend more on coffee than on retirement. If these millennials are putting all their savings towards debt repayments, it’s easy to spend more on coffee than retirement savings. I’m not worried about these people, as long as they are actually paying off those debts. If they’re instead buying money on coffee and other items rather than chipping away at that debt, then they should revisit their budget.
I am worried about the group of millennials that thinks they have tons of time to save, so they’ll just wait until they earn more and will enjoy themselves now.
For example, let’s say someone earns $50,000 and saves 10% of their income, or $5,000 per year. If that individual is 25 now, they end up with $604,000 at age 65. If that person started saving at 35 instead, they’d have to save over $9,000 a year to end up with the same amount, almost double, and almost 1.5x the total amount of savings over their lifetime. If they didn’t start saving until age 45, they’d have to save over $18,000 a year; that’s almost 4x than if they started at age 25, and their total savings over their lifetime would be $365,000 rather than just $200,000, almost double.
Let’s look at this another way, say the individuals in my previous example only saved $5,000 per year, no matter what age they started at. The person starting at age 25 would still have $604,000 for retirement at age 65, while someone starting at age 35 would only have $332,000, and someone starting at age 45 would only have $165,000. That’s a big difference.
The other group of people I’m worried about are the 52% of the study respondents that said their savviness on investing is low, and the 32% whose biggest concern on investing is about lack of knowledge. If these people are paralyzed by their lack of knowledge, they could miss out on compound returns.
This study that millennials spend more on coffee than on retirement fits nicely with a popular finance term called the Latte Factor, which was popularized by David Bach, author of the Automatic Millionaire. The Latte Factor is where people mindlessly spend small amounts of money on everyday small purchases (like Lattes), which then add up to large amounts over the year. For example, say you spend $5 per day on coffee. That adds up to almost $2,000 a year. Or $10 on lunch during weekdays is more than $2,500.
Now I’m not saying you can’t spend your money on these things. If you love coffee and would be miserable if you didn’t get to drink it every day, that’s fine. If you’re consistently saving and investing and coffee and lunches are coming out of your “fun money”, go ahead. Often, focusing on bigger ticket items that you regularly spend money on (like rent and mortgages) will make a much bigger impact. But if these seemingly small expenditures are hindering your ability to save, and they aren’t aligned with your goals and values, then millennials (and anyone for that matter) need to rethink their spending.
