SMART MONEY: Don't blame the coffee

By Brad Brain

In personal finance, it’s common to look for scapegoats. The idea that there is some simple explanation for the challenges that we face is a popular narrative.

Lately some of the finger-pointing has been directed at something as innocuous a daily cup of coffee.

Now, there actually is some logic to this line of thinking. The idea is that, rather than treating yourself to a fancy $5 gourmet cup of coffee, you simply brew your own at home for a lot less money. To make the strategy even better, take that money that you saved and invest it for long term growth.

On the surface, you can’t really argue with the general principles of this idea. Saving money is a good thing. Investing for the long term is a good thing.

However, …

Let’s look at the math. If you are spending $5 a day on coffee, that’s about $150 a month. Over the course of an entire year that would add up to be about $1800. There is nothing wrong with saving part, or even all, of that $1800.

And sure, if you invested $1800 for decades at a great rate of return then, over time, the power of compounding will make that money grow to an impressive sum.

All of this is true. Yet…

We are talking about $5 a day. This is not where the big gains are to be had.

To be clear, I am not saying that there is no benefit to be had by cutting down on discretionary expenses. My point is that we are focusing on five dollars a day. There is only so much that can be done. The impact of saving five bucks is… five bucks.

This line of thinking is not limited to just coffee. In the investment world it has become quite fashionable to talk about expensive mutual funds are.

Again, there is some logic here. Keeping your costs down is a good thing.

However, …

Mutual fund expenses are measured in fractions of a percent. Sure, if you apply even fractions of one percent to a big enough principal over a long enough time it will add up to a decent amount of money.

But, still, we are talking about fractions of one percent. There is only so much cost saving to be had.

To be clear, I am not apologizing for mutual fund costs. If you can find a superior option for your investments for a better price, then its worth considering. That’s not the point.

My point is in the financial world there can be an enormous amount of attention given to things that don’t really move the needle very much, while the things that do the heavy lifting are often overlooked.

If you want to make a truly significant impact, don’t focus on the five dollars. Instead, take a look at where most of your money is going. Bigger dollars, bigger potential impact.

If you just signed up for an $1,800-a-month truck lease, skipping your cappuccino isn’t going to save you. If you are in a 40 percent tax bracket, it’s not the MER of your mutual fund that is eating your wealth.

Here are the types of things that can have a material impact on your financial success: What kind of tax planning are you doing? What proactive steps are you taking to pay off your mortgage? How big is your vehicle payment? Are you carrying a balance on your credit cards? How many expensive toys sit in your garage, maybe even gathering dust?

If you want to cut down your coffee expenses, then go right ahead. There is nothing wrong with saving five bucks, but it is these big-ticket items that are the things that will have real impact.

The reality is that it is easy to look for a scapegoat. And it’s hard to take responsibility for our own actions. People can take $15,000 vacations and yet still think it’s the $500 in mutual fund fees that are expensive.

I’ll see someone obsessing over a 0.2% difference in investment costs, while simultaneously making lifestyle choices that will obliterate a small, smart decision. Maybe you could save $200 a year by going with a no-frills investment. But you could also save $2,000 a year for the next seven years by not financing a jet ski that you’ll use four times this summer.

The purpose of this article is not to make you feel bad about your spending decisions. What I am saying is to make significant financial impact you need to go where the money is, and that probably is not the $5 coffee.

Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.