The answer my friend is…
Not blowing in the wind, but in this BLOG POST!!!
That is right, I do believe I have the answer to all (well most) of your questions on how to achieve the financial independence (FI) part of FIRE (Financial Independence, Retire Early). Like I said, in my first post, I have great power!
In fact, it is the answer to most questions the that relate to finance – and it is not 42 (nerd reference) and it’s not 25 (well that is a key number in FIRE land). The answer to most FIRE questions is, drumroll please….
“It Depends”.
I should point out this is not me trying to be clever, and as a numbers person it is almost painful to not be definitive, but a reflection of the fact that I believe there is no “one-size-fits-all” answer and that any time you read definitive advice from a blogger/podcaster/adviser, you are reading the answer that worked best for them in their situation at that point in time.
The “Latte Factor” as an allegory
I think this is best explained with my take on one of the classic FIRE discussions – buying a coffee (or as many FIRE community say – the Latte Factor).
The views range from:
‘cut out the daily coffee purchase to make X hundred thousand dollar in Y years’
to
‘it’s only $5, focus on the bigger picture’.
I have to admit, I have lived both philosophies and have arrived somewhere in the middle. So, should YOU cut out your daily coffee purchase if you are pursuing FIRE?? Well, it depends! I hope you will see from my (over long?) thoughts below, why that is.
Firstly, I started off never buying coffee. And I mean never. Up until my late 20s, I thought it was insane to pay $3 (it was a while ago) for a coffee when I could make it for about 5c at home. Particularly given I could taste no difference between the free coffee I got on a flight, the instant coffee I made at home, or the coffee my friends bought when out and insisted I try so that I could appreciate how good it was.
Fast forward a few years, and whilst working in an Investment Bank and regularly doing 14+ hour days, I moved to a minimum of 2 large coffees from baristas every day and became a coffee snob. In fact, I still remember during a holiday in America many years ago throwing out a coffee that I just paid US$3 for (so still A$5) after one sip as it was so bad, and heading off to find another coffee. Embarrassingly, I have to admit becoming one of ‘those people’ who had coffee stories (like that one before) and sneered at people who said they couldn’t tell the difference between instant, Starbucks, or a coffee from a trained barista.
Move on a few years later and I shifted to making my coffee at home in my Nespresso machine (and only buying my Nespresso pods when I could get them on special) and bringing it to work. Move on to today and I am now about 50/50 on the split between home-made and store bought coffees
So, in summary, I went from spending 10 cents a day on coffees, to $10 a day, down to about $3 a day (four capsules) ,and now about $5 a day. And guess what, at every stage it was the right decision.
Early on, I couldn’t tell the difference and so why spend 100x ($10 vs 10c), particularly when my daily salary was only around $100 after tax. But then as I moved into the investment banking world, time became far more valuable, my daily salary more than quadrupled, and the sheer mental effort of trying to save a few dollars by making coffee after another 20 hour day was not worth it (at my peak, I would have easily been spending $3,000 a year just on take away coffee). Plus I started to really appreciate a good coffee. At that point I would have happily paid $10 for one coffee if I knew it would be a good one.
But then I left the investment banking world, my salary shrunk (the second time I took a 50%+ pay cut for life-style reasons but that is a story for another day), demands on my time shrunk, and while exploring the internet on one of those slow days I stumbled across Mr Money Moustache. This (eventually) forced me to examine my coffee habit.
When “and” is the slippery slope to spending too much
And when I did, I realised that my coffee habit had become a “coffee and..” habit.
What had happened was that after a while of buying my coffee, I figured that since I was waiting for a coffee and I liked a bacon and egg rolls, it made sense to get them at the same time since the coffee store often had a combo special, and it was certainly more time effective than making a bacon and egg roll at home – and it was only a few dollars more. But I soon realised that what made my coffee taste even better was enjoying with something sweet – like a brownie. And so my $5 morning coffee was actually a $13 morning feed.
My lack of planning crept into lunch, and so the occasional take-away lunch had become a daily take-away lunch ($10 on a good day), and of course I had to have something with may afternoon coffee so the afternoon coffee was actually a $10 snack. Before I even crunched the numbers on my trusty Excel spreadsheet my FIDER-sense was really tingling. In fact, my ‘coffee habit’, which had grown into a ‘coffee and …..’ habit was now a full blown financial issue to the tune of ……drum roll.. over $7,500 a year AFTER TAX!!!! This is equivalent to around $15,000 pre-tax given I was in the top tax bracket. My head was spinning – as spiderman would say ‘Did anyone get the number of that truck’! I mean, I used to be the graduate who only ate Weet-bix for brekky, drunk free instant coffee or water at work, and had a jar of vegemite and a jar of peanut butter at my desk and would buy name brand bread and make my own sandwiches. I still remember when I decided to splurge and buy bread rolls from the local bakery for lunch as I could get 6 for $1 as that upped my weekly lunch bill from $2 to $5!
Needless to say, I quickly adjusted. Instant coffee was just a bridge too far, but the Nespresso machine gave me 80% of the taste for 20% of the cost. I made my own brekky, pre-packed 5 days of ham, cheese and tomato sandwiches and use the sandwich press at work, and hey presto was down a daily cost closer to $4 rather than $30+.
So by ditching my daily ‘coffee and …’ habit, I was banking close to $6,000 a year extra after tax. Throw that in a spreadsheet, project it forward 25 years, assuming a mere 6% post tax return and 2% inflation and it is a cool $421k+ extra I would have in my retirement account.
After a few years of doing that and angrily shaking my fist at anyone who dared question the value of cutting out the store-bought coffee (helloooooo Ramit Sethi), one day, I decided to listen to their reasoning. After all, some of these people were successful, had achieved FI, and had other good ideas so I needed to know how they could get this so wrong. That was when I had my light bulb moment. Sometimes they were right!
There were times it was crazy to spend mental energy saving $5 on the coffee and not paying attention to how it was affecting my family or mental health. An internal 15 minute monologue chastising yourself for thinking of buying a coffee is never a good use of time! Similarly, actively seeking and preparing for a job opportunity or promotion that pays another $10,000+ should not be side-tracked by a $5 decision.
I now enjoy my mindful coffee purchases as part of my FIRE journey
And so now here I am, on the days I want a great coffee from my favourite place I get it, and on the days I am out with the FIDER-lings (FIDER-woman and FIDER-girl) and they want to get a coffee and an ice-chocolate, I get a coffee guilt free and enjoy it, and they greatly appreciate being able to enjoy their drinks rather than sitting with a sullen FIDER-man staring at his free water in a glass.
So, like I said, whether cutting out the coffee is important on your FIRE journey is ‘it depends. I do believe, that at certain times, and for certain people, cutting the coffee habit is absolutely the way to go – it is immediate, measurable, achievable and far less daunting and disruptive than moving house to save travel costs or the stress of changing jobs. I also think for those of us who have the ability to save other bigger costs we have to remember not everyone has those opportunities: For some people cutting the coffee is the only meaningful opportunity they have to start a FIRE journey and to dismiss it as silly, meaningless or a distraction is to tell them they haven’t actually started a FIRE journey, or even worse can’t ever start a FIRE path – and I think that is wrong.
For me, cutting the ‘coffee and..’ habit was my first step conscious step on a FIRE journey – I felt a sense of accomplishment and after a while I looked for the other wins – the renegotiation of the mortgage rate (scary – I hate calling strangers – but effective), moving house (WOW – is that a big story) and after a while I realised that I had taken a lot of steps (does that make me a FIRE-walker??) and it was time to slow down, and smell (a professionally made) coffee.