Question

This morning I ordered my standard coffee refill from the Global Cafe for $1.09 (it is a lot cheaper if you are bringing your own cup). Before tax, a Venti Carmel Machiatto cost $4.95. Let's call the difference between the two $4. Assume that you buy coffees every week during the 52 week year. If you drop down from the Carmel Machiatto to a basic coffee, save $4 each time, and invest that $4 in an account that returns 6% per year, how much will you have in your account after 40 years? Do this on a monthly basis ($4 * 5 * 4 = $80) and use an interest rate of 6%/12 = 0.5% per month. Does this make you think twice about that expensive Carmel Machiatto calorie bomb?

Answer 1

Answer: $159,319.26

Explanation:

The monthly contribution of $80 is constant so this is an annuity. As we are to find the value after 40 years, this is a future value calculation.

No. of periods = 40 years * 12 months = 480 months

Interest = 0.5%

$Future Value of Annuity = Contribution * \frac{[(1 + r)^{n} - 1]}{r} \\\\= 80 * \frac{[(1 + 0.005)^{480} - 1]}{0.005}\\\\= 159,319.2587$

= $159,319.26

I think savings that add up to $159,319.26 will make most people think twice about the expensive Carmel Machiatto calorie bomb.