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Millennials, Coffee and Compound Interest

 January 30 2017     Anna Pfaehler
I have a confession – I am a millennial. I like participation awards. I value experiences more than things. And I have a deep love for coffee. Anyone who has ever heard me talk about budgeting knows my “fun money” goes to Starbucks and my husband’s goes to craft beer (he’s also a millennial).

A recent survey from Acorns, a microinvesting app that saves spare change from purchases, found that 35% of 24 to 35-year-olds spend more on coffee than they save for retirement. The survey also showed that millennials are uncomfortable investing because of a lack of financial education. As one colleague pointed out to me, you don’t appreciate the power of compound interest until it is too late.

My Starbucks order –and I’ll grant that Starbucks is a rather mainstream coffee shop but it has a drive through and it is conveniently located for my commute—is a grande decaf soy latte. It runs me about $4.25. While in college I set a one-per-week limit for myself to which I still adhere. Therefore I spend about $221 per year on Starbucks.

My weekly ritual is tame according to CNBC which estimates that my generation spends $80 per month, or $960 annually, on coffee. If you stuffed the cash into a mattress, you would have about $43,200 after 45 years. If you invest it at 5%, it will be around $153,000 at age 65 – a more substantial nest egg. The difference is compound interest.

In year 1, only your contribution grows. In year 2, your contributions plus the growth from year 1 grows – and so on. Ultimately the size of your nest egg will depend on the growth rate and how long you can go without touching the money. Compounding is more powerful the longer your time horizon. Hence my colleague’s lament about not starting sooner.

While redirecting some coffee money toward retirement could be wise move, I’m not one for an all or nothing approach. Putting the entire coffee budget towards retirement is likely to cause you to quickly abandon your savings goal in pursuit of a caffeine fix. Budgets need wiggle room to be successful.

Additionally, Millennials have other financial priorities that need to be addressed, such as paying student loans.  Millennials should instead aim to have at least 20% of their income go towards saving and paying down debt. As far as retirement goes, millennials should seek to contribute at least enough to an employer’s retirement plan to receive the full matching contribution, if there is one. Millennials should work toward saving 10-15% of income for retirement.

Changing your spending and savings habits doesn’t have to be difficult either. Consider increasing your retirement savings by just 1-2% of your income annually. Some plans even let you schedule annual increases so you do not need to remember each year. Chances are you won’t miss the money in your paycheck. If it still seems too difficult, try taking a hard look at your budget. Coffee might not be the only splurge you are (arguably) wasting money on. Your future self will thank you.