Why Delay Spending?

Starbucks Coffee
Yesterday we were reading one typical blog post where someone discussed how he had exit the consumerism. As proof, the blogger does not purchase daily morning coffee at Starbucks for €4 like his colleagues anymore. The article was mainly about how the money saved from not buying coffee will produce gobs of money that will eventually enable him to retire early. Is this the right way to think about delayed spending?


Delayed Gratification
Given the today’s record low interest rates, one asked whether the delay was worth it. This person was immediately attacked by a second commenter as “an idiot” who needed to examine how his “low living standards” would allow him to view Starbucks coffee as gratifying. The second closed with the statement that when he will be 65, he will be able to drink more due to his delayed spending.


This question turns out to be quite serious. To be worthwhile, the inflation rate of coffee needs to be beaten. You can save your €4 on coffee and invest it. If you take it out next year to buy that coffee you did not have last year, you will probably be surprised to find that while the amount of your savings is slightly more than €4, so too is the price of coffee. If you invest that €4 for 25 years, it will grow considerably, but so will the price of coffee. If your investments do not exceed coffee inflation, you will never have more than the price of one cup of coffee, whether you save the money for one year or 30 years.


Beating Inflation
Is it really possible your investments will not exceed inflation over time? For many people it will not. If you put your money into safe places like savings accounts and government bonds, it is a very good bet the return will not exceed inflation significantly. With stocks and other higher return investments, you have a chance at beating inflation. However, usually a lot of people do not achieve market returns because they jump in and out of the market at the wrong times. They may also have a low risk tolerance or have the bad luck of investing during a long period where the market goes down for years like in Japan.


Delayed Spending
So why we delay spending? Is it really just to invest the savings so that we can withdraw the money later and spend it on the same inflation-adjusted goods? The scenario painted by the second commenter is not really true. If someone enjoys their cup of coffee now and chooses not to enjoy another one later, in isolation it is not very different from waiting and drinking it in retirement. One person drinks the cup of coffee at age 25, the other at 65.


Needs versus Wants
Let us be honest. We do not abstain from coffee now so that the savings will compound and enable us to have more cups of coffee later. The real reason we cut back on Starbucks coffee is that it is a total luxury, it is one consequence of true hedonism. We do not need coffee. We do not need regularly this status symbol. And we do not need someone else to make it and serve it to us on our way to work every morning. The reason is not compounding, rather changing consumption away from luxury goods to goods we really need. If you save the money, it affords you the opportunity to spend it on something more useful later on. By having a lot of savings, it enables you to withstand adverse financial events in your life. Thus, the shift in consumption from wants to needs was started at the time you saved and completed when you later needed the money for necessities. There is an additional mammoth benefit from having a solid household balance sheet. People like Warren Buffet has shown the world that having a fortress balance sheet gives you financial opportunities only available to a few.



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