Upgrade the way you learn with Brilliant! To get started for FREE go to http://www.brilliant.org/howmoneyworks

Sign up for my newsletter https://compoundeddaily.com 👈
-----

Edited By: Andrew Gonzales

Music Courtesy of: Epidemic Sound

Select Footage Courtesy of: Getty Images

For sponsorship inquiries, please contact [email protected]

All materials in these videos are for educational purposes only and fall within the guidelines of fair use. No copyright infringement intended. This video does not provide investment or financial advice of any kind.

#finance #investing #personalfinance

-----

A 2022 Survey conducted by the lending club bank found that more than a third of people earning over $250,000 a year were living paycheck to paycheck, and if someone earning four to five times the national average can’t get ahead then what hope do the rest of us have?

A popular trend amongst financial influencers is to blame people’s poor personal money situations on small but repetitive purchases with the number one target being coffees.

I mean seriously, it feels like anybody that has every posted a video about how to make $100 a day in the current year with little to no experience or trade stock options for a profit seems to hate coffees as much as they hate the efficient market hypothesis.

But is that daily Starbucks actually making things like paying off debt, buying a house and saving for retirement impossible?

Well, anybody who watches my channel regularly will know that I don’t like dragging out the answers to simple questions and, also, you can read the title of a video so, no, that daily cup of joe is not doing anybody any significant financial harm.

People like to say that it will for five honestly pretty terrible reasons, and if you listen too closely to the people hating on your morning pick me up it might end up hurting your personal finances more than the Starbucks ever could.

Most market research reports suggest that roughly three quarters of people drink coffee every day.

If you are writing a book on personal finance or trying to build an audience by giving out broad general financial advice it only makes sense to go after an obvious expense that for a lot of people is there one daily luxury to help get them through the working week.

Something so simple and easy to start is a great marketing hook to capture people’s attention to either get watch time up on a video, sell a book or promote an upcoming seminar.

The attention-grabbing hook of a coffee a day costing you your financial future works especially well when it’s combined with a dubious calculation using compound interest.

A $5 coffee every day is costing you $35 a week, if you invested that for 40 years in a portfolio making 10% then in 40 years you would have almost a million dollars.

The math check out, you can do it yourself using any compound interest calculator on the internet, but it makes a lot of assumptions that are terrible and would never be made by a real financial professional.

10% is the approximate rate of return for the S&P 500 over the past 50 years, but that has been an exceptionally good run, it’s highly likely that those returns will be lower into the future.

A good financial professional looking that far ahead should include that likelihood in their projections.

Even if returns do stay the same the average investor typically makes less than half of these returns.

A study conducted by the investment research firm Dalbar Inc found that the average equity fund investor made a return of just 4.25%.

If someone is in a financial position where their $5 for their daily coffee is the only money they can save to make contributions towards their retirement savings, they are likely not going to be able to grow that account before it becomes too tempting to access to cover an unexpected expense.

The daily coffee equation also doesn’t include inflation or taxes that will both eat into this final figure considerably. Using a more realistic compounding factor of 3% giving up the daily coffee and putting it all into an equity portfolio would net you just under $140,000 after taxes, hidden or direct trading fees, inflation and realistic portfolio management.

$140,000 is still a lot of money, but it’s not going to fund anybody’s retirement, in 40 years’ time it might struggle to even make a down payment on a basic home.

So it’s to Learn How Money Works to prove that your daily coffee did not cost you your financial future and work out the things that actually did.