When I went to the best financial conference ever a few months ago, Vanguard had a booth. They were giving away coffee and reusable carafes (not sure what they are called, but you can see them in the picture).
Vanguard’s coffee marketing pitch was simple. The average coffee costs $1.48 and they can make it and sell it at 26 cents. Their fund expenses are 1/5th the average… just like the cup of coffee they are offering you.
They take the analogy and show that with Vanguard funds you’d have nearly $64,000 more over 30 years than if you invested in funds that have average expenses. In my opinion, the marketing geniuses at Vanguard hit a home run with this campaign.
The only “problem” is that they convinced me of the value of their low expense ratios well over a decade ago.
I’m more interested in the coffee. Here’s the curveball, I don’t even like coffee. I can’t stand the stuff.
However, from a personal finance perspective, coffee is amazing. People toss around David Bach’s Latte Factor® to refer to the huge financial impact that small recurring purchases make over a long time. However, it is very rare to see such a calculation done with coffee (or latte, or espresso, or frapamochachinoresso).
So let’s do this.
How much does it cost to brew a cup of coffee?
That sounds like an easy question, but there’s a lot to it. I thought about breaking down the math, but I took the Lazy way out and relied on some others. There’s no need to reinvent the wheel. The Simple Dollar prices coffee at $0.44 for 16 ounces or $0.22 for 8 ounces. Coffee Detective says it is $0.27 for a 6 ounce cup… or $0.36 for 8 ounces, while noting that Maxwell House can be done $0.08 per 6-ounce cup… or 10 cents at our normalized 8 ounce cup.
However, Dr. Penny Pincher takes the cake. He goes into way too much detail about the cost of brewing a cup of coffee. He uses 16-ounce as his coffee size and comes up $0.60 for a great cup of coffee or $0.11 for a cheap cup of coffee. For our 8-ounce cup, it would be $0.30 for a great cup or 5.5 cents for a cheap cup.
Averaging the Simple Dollar’s coffee, Coffee Detective’s coffee, and Dr. Penny Pincher’s great cup of coffee comes to about $0.29 to brew 8-ounces of coffee at home. That’s very close to the Vanguard example of it costing 26 cents.
How much is a cup of coffee at a coffee shop?
There are a lot of coffee shops out there and there are a lot of sizes of coffee. To simplify things, I picked the three that I consider the largest, Starbucks, Dunkin Donuts, and McDonalds, and averaged the prices of two sizes:
|Coffee Shop Avg||16 oz.||$1.75|
|Starbucks (Tall)||12 oz.||$1.75|
|Starbucks (Venti)||20 oz.||$2.25|
|Dunkin Donuts (Medium)||14.oz||$1.79|
|Dunkin Donuts (Large)||20 oz.||$1.99|
|McDonalds (Small)||12 oz.||$1.00|
|McDonalds (Large)||20 oz.||$1.69|
[Pricing data has been pulled from websites such as Hack the Menu. I’m sure that prices vary by region and stop.]
So the average coffee shop coffee is going to give you around 16 ounces at around $1.75. The most “average” cup of this sample size is the medium Dunkin Donuts which comes in at 14 ounces for $1.79.
That’s a little more than Vanguard estimates, but perhaps they took the cost of the smaller sizes. After all, this is twice the amount of coffee on average as what we estimated for brewing at home.
The Cost of Coffee at Home vs. Coffee Shop
Even though I’m not particularly a fan of coffee, I know people take their coffee seriously. I’m not going to weigh in on personal taste preferences… to me they all taste horrendous. There’s also value to the comfy chair, winks from the barista, and free wifi at Starbucks. (Wait, I’m just imagining the winks when I order the flavored tea?!?!)
I’d like to conclude by saying that you’ll save millions by brewing at home. I just don’t think that’s true. Brewing at home costs 58 cents for 16 ounces and the coffee shop is around $1.75. It looks like you can save yourself $427 a year by brewing at home.