Fact Check Finance: Skipping Your Morning Coffee Will Make You a Millionaire

Will skipping your morning coffee make you a millionaire? Personal finance pundits love to tell people to give up what they love to become millionaires. One of the more popular soapbox sermons says that you are throwing money away on a daily cup of joe. If you saved it instead, it would make all the difference in your future.

How to be a Millionaire

Before I give my thoughts, let’s dissect the assumptions as posed by Suze Orman.

  • You spend one to three dollars every day on coffee, averaging $100 per month.
  • You are eligible for a Roth Individual Retirement Account (IRA).
  • You will forego the cafe stop to put the $100 you’ve then saved into a Roth IRA at a 12% return.
  • In 40 years, that Roth IRA will reach $1 million.

I have nothing against saving for the future, Roth IRAs, or a 12% return. All of those things are great. The average cost of a cup of coffee in New York City is $3.12, so her estimate is not too far off. Also, saving $100 a month is not outrageous or unachievable. However, the remainder of this scenario is incomplete and not very realistic.

skip coffee to be a millionaire

Roth IRA Eligibility

First, every person is not eligible to contribute to a Roth IRA. Depending on your income level, your contributions will phase-out based on Internal Revenue Service (IRS) guidance. All income levels refer to your adjusted gross income which you, or your tax professional, will calculate when you file your taxes.

Rates of Return

Then, a 12% return is based on the S&P 500 returns from inception until 2016. The stock market is averaging 7% overall, and the S&P 500 is averaging 6.472% over the last 40 years. The S&P 500’s maximum return is 10.282%. With these figures, primarily if you aren’t investing in the S&P 500, your balance would be a lot less in 40 years.

Inflation and Retirement

skip coffee to be a millionaire

Finally, the proposed savings plan does not take into account fees or inflation. Let’s assume you opened a no-fee Roth IRA. Inflation rates will stick reek havoc on your balance. At a modest inflation rate of 2%, your balance drops by more than half in today’s dollars to $452,890. In other words, your projected million will go half as far. The average retiree needs about $46,000 a year, so your balance, with inflation, gives you almost ten years of income. You will have even less income at a more reasonable rate of return.

Will You be a Millionaire?

I encourage the use of a Roth IRA, but I don’t think a 12% return is realistic. Telling someone to skip a cup of coffee every day for the next 40 years seems foolish and extreme. However, I know there is a level of sacrifice required to be a millionaire. Maybe that sacrifice is daily caffeine.

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