The $60,000 espresso latte





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Published on Mar 27, 2008

Hello. Iím Bernard Hickey with a special report on coffee and the power of compound interest.
This is little exercise I like to do before I buy a coffee and itís something my good wife reminds me about regularly, generally itís every month when we pay the mortgage.
Hereís the nub of the issue.
This coffee is very expensive. It will cost me 60,000 dollars over 20 years.
Now I know the price of coffee has gone up recently but let me explain how a single cup of coffee is worth 60,000 dollars to me over 20 years.
Hereís the deal.
If I had limitless funds, I would buy a coffee every day. Itís my little treat. I like to buy a coffee and sit down and read the paper. It seems a cheap way to have a break.
In New Zealand a large flat white at a regular cafÈ costs about $3.50 to $4.
If you go to one of those American style syrup cafes like Starbucks it costs around $5 to 6$ bucks a cup.
Now if I buy one coffee a day, every work day for 50 weeks a year, which to be honest is being conservative, that will cost me $20 a week or $1,000 a year.
Now Just imagine if I chose to use that 1,000 a year to pay off my mortgage. How much would that save me over the 20 year life of the mortgage.
Weíve done the calculations and its startling. Iíll never pay for coffee again.
Paying off the mortgage would save me $60,000 over the life of that mortgage.
Thatís the power of compound interest at work and a 9.7% interest rate, which is what the average 2 year fixed rate mortgage costs these days.
And remember thatís an effective rate of return of closer to 12% in pre-tax terms.
Next week, weíll ask how much would I save if I didnít buy that Porsche Cayenne Iíve got my eye on. Weíll be doing that one on location
Iím Bernard Hickey from on the power of compound interest and the real cost of a cup of coffee.


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