The espresso portfolio

coffee

It is all too easy to underestimate the effect of gradual saving and consistency in building wealth. Wealth can come many ways but mostly it comes from saving.

This article by Dimensional Fund Advisors’ Jim Parker, is a wonderful illustration of the results you can achieve over time if you start early and exercise discipline and patience.

A taste for coffee

The son of a friend had just graduated from university in Australia. In his early twenties with student loans to pay off, the capacity to save was a bit daunting and easy to dismiss.

We met for a coffee. Josh had acquired a taste for espresso while studying and working as a waiter. I asked how much he thought he spent on coffee. It turned out that a couple of cups a day equated to around $160 a month.

The next question was obvious. What if you could give up the espressos and put what you would have spent into a savings scheme instead? The response was just as expected. Reluctance to eliminate the caffeine kick and doubt that a few dollars would make a difference.

The first part of the solution was the suggestion that he make his own coffee at home and carry it with him in a flask. The second was a lesson about compounding.

The miracle of compounding

With a starting balance of $100, contributions of $160 per month and an expected return of 5%, Josh was likely to accumulate savings equating to $250,000 by the time he retired. If, when earning, Josh was able to increase his monthly contributions to $500, he could expect to realise $750,000 by the time of his retirement.

It sounds too easy

It is easy. If all interest is paid into the account and included in the next calculation, you earn interest on interest. There are a number of important things to remember:

  • Start early
  • Save every month, consistently
  • Stay patient
  • Earnings are subject to tax.

Enter the espresso portfolio. The kicking of a coffee buying habit was replaced by the slow roast of a savings scheme that promised future financial security.

Once again it’s about the ability to control our behaviour towards money. And having a trusted financial advisor and mentor.