The latte factor

A $3.95 Starbucks latte

In case you were wondering, I am really enjoying the skiing here at Whistler. Using some of the local lingo to describe going down the snow covered slopes of Whistler and Blackcomb, I believe the term would be “that run was sick!”

During this process as we invariably took a break to have a coffee (okay for me it would be a hot chocolate), I was reminded of a book I read some time ago called “the latte factor”. I think this was triggered by the price Denise paid for her latte up on the mountain ($5.50 including soya milk and tax). One minor annoyance here in Canada is sales tax always gets added on top of the quoted price. I am old enough to remember when this was the case in South Africa when we had GST (before VAT).  I must say our current system is much better.

The latte factor tries to estimate the additional amount of money one could retire with if you gave up your daily latte and instead invested that money. Let’s make some assumptions:

1. You bought one latte every day of your working life (a little over dramatic but it illustrates the point better). Some people have more than one in a work day so perhaps not that unrealistic for some.
2. You buy from Starbucks (currently $3.95 per cup).
3. You invested your money on the JSE with a long term average return of 12%.
4. All calculations are in today’s value (no inflation or discount factor to simplify things).

This means 365 lattes or at a cost of $1,441.75 (R9,977) per year. Let’s say you did this for 40 years of your life. If each year you instead added this exact amount to your investment compounded at an annual growth rate of 12% you would end up with an additional $1,105,954.06 (R7,321,416) in your pocket (in today’s value of money). And let’s not even start to talk about the cost of buying cigarettes! This example might illustrate the power of compound interest better than the cost of coffee addiction but still, no one can deny that is a massive saving.

Some people would argue it is not just about the coffee but the whole Starbucks experience. I am however not sure how standing in those queues and fighting for your morning coffee fix can be worth over $1 million. No wonder Starbucks is valued at around $24 billion.

Possible next business in South Africa – a drive through coffee franchise.