The Coffee Paradox: Understanding the True Value of Small Expenses

I go to a café every day to enjoy a coffee.

And yes, I'm fully aware of the financial advice floating around out there, telling me that I'm throwing away potential investments with every cup.

I honestly don’t know how much a cup of latte will cost you in your country because it is different if you’re in San Diego vs. Penang (where I live). But let’s assume it’s $5 for a simple discussion here.

Now, you might be thinking…

"Is it worth skipping out on a small pleasure in life just to be able to save $5?"

Before we dive into this controversial topic, I need you to understand the broader context of saving that $5 versus continuing to enjoy your daily coffee. Have you ever heard of the butterfly effect?

Imagine chilling at a park and seeing a cute little butterfly flapping its wings. You might think, "Aw, that's nice," and not think much of it. But here's the kicker: that tiny flutter from the butterfly stirs the air around it, which stirs up a bit more air, and even more air, and before you know it, it's caused a whole ripple effect.

That might sound far-fetched, but let's follow this phenomenon further.

These little changes in the air could eventually build up into bigger changes. Picture a butterfly flapping its wings in Brazil and causing a tornado in Texas!

The idea here is that even small actions can have big, unexpected effects down the line, especially in complex systems like the weather. That's the butterfly effect in a nutshell—it's all about how little things can end up making a big difference. 

Now, you might ask, "What does my daily coffee have to do with butterflies?"

Let's delve a little deeper…

Consider if you chose to forego that daily $5 coffee.

You might reason, "It's just $5; how much of a difference could it make?"

But remember the butterfly. The small action of saving that $5 daily, like the butterfly flapping its wings, can cause a ripple effect over time. 

Say you invest that $5 every day. Over a year you'd have saved $1,825. Let's say you decide to invest this amount annually over 30 years, with a modest return of 5%. By the end of these 30 years, your coffee money would have grown to approximately $125,000.  

Not bad for a small daily saving, right?

More importantly, it's not just about the money you've accumulated, it's about the shift in your mindset. This little thrift act could fundamentally change how you view and handle money.

Choosing to save, and forgoing instant gratification for future rewards, signals a shift from a consumption mindset to an investment mindset. It's about realizing that small sacrifices today can lead to significant gains in the future.

Now that you understand the context, here's the thing: This isn't to say that you should deprive yourself of all life's pleasures.

If you truly love that morning coffee ritual, it's perfectly okay. The goal isn't to make yourself miserable by cutting all expenses; it's to be mindful of where your money is going and ensure it aligns with your values and goals.

With that context in place, I would rather continue to have my coffee and find ways to earn the $5 with different means instead of saving for it. Because when you are forcing yourself to give up little joys and pleasures you can afford in life, in my opinion, you’re damaging your wealth mindset without realizing it.

Think about it.

Telling yourself that you're not worth it, that you cannot even afford a cup of coffee, that you need to live frugally in this world... these thoughts can negatively impact your wealth mindset.

And a damaged wealth mindset can affect your financial decisions in the future and even your happiness.

When people are overly thrifty, they may develop what's often called a scarcity mindset. Sendhil Mullainathan and Eldar Shafir, in their book "Scarcity: Why Having Too Little Means So Much," suggests that when we feel we don't have enough of something (in this case, money), we can become hyper-focused on that perceived lack. This narrow focus can make it harder for people to see opportunities and make long-term plans crucial to building wealth. 

Moreover, a 2007 paper by Guiso and Paiella from the Bank of Italy showed that risk aversion negatively correlates with wealth, suggesting that overly thrifty individuals who avoid financial risk may also avoid the opportunity to accumulate wealth.

But here's the good news, what if you can EARN to replace the “loss” income you’re using to spend?

Because it’s not very hard to earn some extra income, I’ll cover some ideas and ways in other issues. Or you can just go to YouTube and search for content related to side hustles.

In my case of spending money on coffee daily, it justifies tremendously because the environment is conducive for me to work.

With that, it allows for higher productivity and better-quality output work. All for just $5.

This means the 30 days x $5 = $150 expense is giving me a higher ROI as my work will generate much more than $150 of expense. So, sometimes, your expense is not an expense. It’s just intangible to be seen as a positive ROI.

While this issue focused on coffee, the underlying message applies to any minor, daily expense. It's not about completely eliminating these expenses but understanding the value they bring to your life.

If your daily latte brings you joy, fuels your productivity, or even provides a moment of quiet on a busy day, then that $5 may be well spent. It's about being mindful of our spending, recognizing the intrinsic value, and weighing it against the cost.

So, the next time you reach for your wallet, pause for a moment and consider the true value of that expense. 

If it enhances your life in a meaningful way, then by all means, enjoy it without guilt.

Remember, money is a tool to enhance your life, not a chain that restricts it— every decision you make, and every dollar you spend contributes to your personal journey of financial wisdom.

You're the one in control.