The cappuccino effect

Wednesday, 8th November is National Cappuccino Day in the United States of America. Although this is commonly a time to celebrate the frothy goodness of this popular drink (whose name was interestingly inspired by the colour of the hooded robes of the Capuchin friars in Italy), it’s also an occasion to become aware of our spending habits. We may live a long way from our cousins in the northern hemisphere, but we can all benefit from the same guidelines when it comes to our financial well-being.

In a recent article published by Personal Finance, an investment actuary crunched the numbers to demonstrate how you can boost your wealth significantly in a relatively short period of time, simply by cutting out just one guilty pleasure a day — a cappuccino.

Many people savour the flavour of this power drink each morning, and many caffeine addicts can happily knock back a few in a row. However, calculations show that if you’re willing to give up just one of those daily cappuccinos, you could save nearly R40,000 in five years and over R90,000 in a decade.

With the ominous effects of inflation and the cost of living on the rise in South Africa, it can often seem impossible to save more money without the help of a big bonus or salary increase. However, Hildegard Wilson, a member of the Actuarial Society of South Africa’s investment committee, is quick to ascertain “that you can save without compromising your overall standard of living. With the power of compounding, where growth on your investment earns additional growth, these kinds of ‘breadcrumb’ savings can turn into large amounts over time.”

If you buy a cappuccino from Monday to Friday at an average cost of R25, your coffee habit is costing you roughly R500 a month. If you opt to forego the cappuccinos, you could alternatively commit to investing R500 a month in a multi-asset high-equity unit trust fund. Over the past decade (calculated up until March 2017), high-equity funds have delivered average annual returns of 8.2%. Although this figure offers no guarantee of future performance, if your investment were to achieve an annual average return of 8.2%, you would have just over R37,180 after five years and R93,130 after 10 years.

So, by foregoing just one cappuccino a day, you could generate a significant lump sum, which could make a serious dent in your debts, or top up an education or retirement fund.

Giving up a cappuccino is just one example of how you can make a difference to your savings. This doesn’t mean you can’t do anything if you don’t drink cappuccinos. The idea is to consider giving up certain little luxuries or vices to help you in the long run. Consider which lifestyle changes you are willing to make — particularly if they’re not good for your health anyway, like smoking — and start taking the small steps towards achieving big financial goals.

Posted in Blog, financial-planning.