There are a lot of naysayers in the personal finance space that scoff at the idea of giving up your $5 cup of coffee to build financial security. The $5 coffee seems to be the target of many F.I.R.E. bloggers. Why do we spend so much time on such a small thing? Because small things add up to big things!
What does $5 get you?
The $5 coffee or $5 breakfast sandwich adds up to about $100 per month if you are only buying during workdays. Since we are talking about retirement here the opportunity cost of the $5 is about that much less you can invest. Now of course you can’t get food for free, so switching from Starbucks to home brewed won’t save you the full $5, but it will save you a surprisingly large fraction of that $5 per day. Let’s just make things easy and say for instance that the coffee is $5.50 and you could make it at home for $0.50.
The Big Surprise
Would it surprise you to know that $5 per day adds up to over $50,000.00 over the course of 20 years?
With a 20 year investment timeframe and 8% average returns, you would have invested a total of $24,000 and have around $54,900 at the end. For F.I.R.E. devotees the math is similar but not as fun. For a shorter timeframe such as 10 years the investment is $12,000 and $17,400 instead.
The Big Budget Item
Americans spend on average around 13% of their household budget on food. That is a big chunk of your discretionary spending. The $5 cup of coffee doesn’t break the bank. But if you add the coffee to the fast food, to the restaurant dinner and the processed food you are looking at a healthy chunk of change.
Me vs. McDonalds
I don’t actually eat at McDonalds very often. I might stop by when traveling, but I don’t eat out on a regular basis. But in the interest of competition I decided to do a breakfast battle. Me vs. McDonalds! Which is faster? Which is cheaper? Turns out it’s not much of a battle. I can fry an egg in about 5 minutes. Toast an English muffin while you are at it and you have an Egg McMuffin clone in about that time. Throw some ham in the frying pan while you are cooking the egg for a more filling version. Orange Juice? Yes Please. Total cost is about $1.50.
Eating out
I tried out the Egg McMuffin meal at McDonalds one morning for comparison. I have a McDonalds that is almost directly on my route to work. I only have to go about two blocks out of my way to stop by. All in, it took just over 8 minutes extra to detour there and get my meal. That’s fast food! Still a bit slower than home cooked though. If they were a few more blocks away from my route or a bit busier then that figure could easily double. The price was about $6.50. That’s more than four times the cost of my home cooked breakfast! Recently in the US, the number of meals eaten out surpassed the number of meals eaten at home.
Rule of Three
Paying someone to make you breakfast? Triple the cost. Paying someone to make your coffee? Triple it. Paying someone to make you dinner? I think you get the idea. Paying someone to serve you dinner and clean up afterwards? It’s gonna cost you even more. It goes as far down as you want. The rule of three even works for the English muffin I bought at the grocery store. Pay them to make your English muffins for you? Triple the price. Now it may or may not make financial sense to make your own English muffins, but you should still be aware that just because the English muffin factory has huge economies of scale does not mean that you can’t beat their price at home. Home made English muffins cost about 9 cents each to make. They are about 27 cents each at the store.
What could you do with 7%?
If you are one of the average Americans that eats out every other meal then you could potentially cut your food budget in half by limiting meals out. That would free up 7% of your budget for other things. 7% is no joke! For an average family that might be $600 per month they could use on other things. This would fully fund your ROTH IRA with money left over. Lets say you free up $500 per month.
The “Other People’s Food” Tax
Adding $500 per month to your investments at 8% will put an additional $87,000 in your retirement account after 10 years and about $275,000 after 20 years. 
That is nobody’s chump change!
A Dual Edged Sword
Budgeting cust both ways. This is a good thing! Cutting your budget frees up cash for investing. This gets you to the finish line quicker. At the same time it also reduces your monthly expenditures. This brings the finish line closer to you! Which is more powerful? Let’s do the math! For a family making let’s say $60,000 household income and investing 10%. Using the 4% rule on 90% of their income gives us a retirement target of 90% x $60,000 = $54,000 / 4% = $1,350,000 as the target retirement balance. This will take them about 38 years.
Saving Life
Adding in the $500 per month extra ramps up their investments rapidly. The savings rate doubles to 20%. Now this imaginary family is reaching their $1,350,000 in 30 years instead of 38. They just saved 8 years of their life. Nice! But wait there’s more. Since the family is now only spending $48,000 per year they can retire on $48,000 / 4% = $1,200,000. The new target is reached in 29 years. So an extra year is saved by reducing the budget in addition to the 8 years saved by increasing investments.
Early vs. Late
The later you make the change to your budget, the more important the withdrawal rate becomes and the less important the savings rate becomes. After 20 years of average (10%) investing, making the $500 budget change only saves 2 years through investing, but lowering expenses still saves that full year due to the decreased retirement fund target amount. Another $500 per month only saves one more year through investing, but saves two more years through lowering the target account balance.
Whether you are early or late to the F.I.R.E. game, budgeting can help get you there sooner.
