Are you sick of being told to ditch the coffees? I am.
Not because I don’t see the point the personal finance commentators are getting at, spending less and investing more is a no-brainer for a lot of eager savers.
It’s just that this particular conversation always ends with a point about how we could all retire earlier or buy a house if only we had a bit more self-restraint or a better morning routine.
That part always feels a bit hard to place. Is it condescending? Is it even realistic? Why am I being scolded over £2.50?
So, fuelled by quite a lovely shop-bought flat white, I thought we’d see if I’m getting rubbed up the wrong way for no reason, and caffeine aside, where the overall message behind the coffee hate might lie.
Can homemade coffee make you a millionaire?
OK, let’s pull off the plaster.
What if you did give up your shop-bought coffee altogether? Well, if a Starbucks flat white is £2.50, saving on 250 of those (a general working year) would pocket you £625.
If you were to redirect that expense into your stocks and shares ISA for 10 years and achieve an annual 5% return you’d have £8,367.79.
That takes into account a £3 monthly fee for the Freetrade ISA but assumes no further charges. If you invest in ETFs or investment trusts they’ll have their own fees on top. It also assumes steady market performance which is in no way a certainty - we’re just using it as an illustration.
Now, that’s not to be sniffed at and it does go to show how a simple change in expenditure can have a big impact.
...But why coffee? There are much more outlandish expenditures we could surely forego.
Smart watches, pets and canned cocktails were all included in the CPI inflation basket this year due to their popularity but we aren’t inundated with messages around the financial perils of Fitbits or Yorkshire terriers.
It’s got a ‘hey fellow kids’ ring to it, especially when there are normally a few nods to avocado on toast thrown in for good luck.
So there’s a glaring finger being pointed at anyone under 40 here. And with that comes the nagging perception that everyone queueing in Costa is just hopeless at managing their personal finances.
So, while the intentions of praising frugality might be there, culturally it’s wide of the mark.
There are other pressing money issues to tackle. Our recent Great British Financial Literacy Test highlighted the need for us to talk about more than skipping the café on the way to work.
In it 88% of respondents from around the UK said they didn’t feel confident in their financial literacy, with one third saying their mental health has suffered as a result.
91% of participants told us they lack confidence in investing in general, with 88% saying they weren’t as confident as they’d like to be when it comes to ISAs.
Just under a quarter of the cohort didn’t know the annual ISA allowance (23%) and 37% of people didn’t know what ISA stands for.
So, we need help. And maybe the coffee hook is just a conversation starter.
In this sense it’s just a short-hand example of a simple, low cost repeat purchase that we take no notice of, but that racks up over time.
And that’s actually where I can start to get behind the intention here.
Forget the coffee, think bigger
It can be enormously encouraging to see what those small investments could be worth in the future thanks to the value of time and compound interest. It can make it all feel a lot more worthwhile, especially for smaller savers.
For example, if you were to put away £100 every month over 10 years, achieving a 5% annual return over the period, you could end up with £15,599.21. Up it to £200 and that could grow to £31,198.41.
Play around with how much you want to put away and what you’d like to achieve here. After all, what numbers you actually have in mind is a personal thing.
But we shouldn’t guess that young people are frittering away their money instead of doing their best with it. And who’s to say that a vanilla latte in the morning isn’t the only treat you should allow yourself amid an otherwise strict savings plan?
Don’t fall into resenting investing
The broader message of constantly denying ourselves something in order to fund a later lifestyle also risks making us resent our investing habits when really we should be looking forward to helping fund our future financial goals.
There’s also a real danger that savers shunning their morning cuppa think that’s all they need to do and it’s only a matter of time before they hit seven figures.
But it’s not the empty mug where the latte should be that’s going to automatically make you an ISA millionaire.
Focus on developing good investing habits
There have to be much better investing patterns built into our habits - ones that feel unintrusive, easy and repeatable.
The amount we can realistically afford to invest will ebb and flow with our lifestyles, our salaries and the financial commitments that life brings us.
It’s much more important to focus on creating a good mindset around investing than pinpointing a daily figure to put away.
Here are four things to think about, away from the amount you actually choose to invest.
- Invest regularly and robotically, in a way that suits your budget. Consistent investors take advantage of the glorious magic of compounding returns over time. If you are saving up cash on the side lines, waiting to jump into the market, you are depriving your money of that snowball effect. Timing the market is also notoriously difficult, let time in the market do the work instead.
- Diversify and get an asset mix that works for your goals. Make sure your time horizon, tolerance for investment risk, and ultimate financial goals are informing the assets in your portfolio. When the asset balance fits, spread your money over a blend of assets and geographies.
- Keep learning. Investing is a funny business. The more you learn, the more you realise there is left to explore. Always try to be a better investor and keep up to date with the market with resources designed to take the jargon out of it all.
- Remember, it’s your journey, no-one else’s. Comparison is the thief of joy. It’s also the cause of most anxiety when it comes to money. Yardsticks around what pension savings you might want to have at certain ages are just that - rules of thumb. They don’t take into account your unique needs and wants. So personalise your budget and your investments. If that means there’s room for a coffee stop on the way to work, do it with a smile.