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Introduction: The “Cup of Coffee Index”
Let’s talk about the cost of living. It’s a topic on everyone’s mind at the moment, and I have a little something I call the “Cup of Coffee Index” to measure it.
I remember when a regular cup of coffee was $3.50, maybe $4. If you were at a fancy, highly Instagram worthy cafe, it might push into the $5 range. Still not cheap, but not expensive enough to be concerned about. Fast forward to today. That same standard coffee is now easily $5 to $6, and that’s not even talking about those fancy cafes. Add a double shot or some soy milk, and you’re suddenly pushing $7 or even $8. It’s absolutely crazy. Not long ago, $8 was almost a full lunch, and now it just covers a single cup of coffee. How times have changed.
Now, indulge me for a moment. If we follow a similar trajectory (and let’s hope we don’t!), by the time our children are adults in 10 or 20 years, a single cup of coffee could cost $15. It’s an unimaginable thought. Who could afford that kind of daily luxury? And I can’t even begin to imagine the price of everything else… It is a scary thought.
Why This Keeps Parents Awake at Night
This isn’t really about coffee, is it? It’s about the uncertain future our children are growing up in. Seeing costs spiral like this is something that no doubt keeps many of us parents awake at night. I know it does for me, though perhaps I’m just a worry wart.
As parents, we are wired to help our children and put them in the best possible position to succeed. Whether it’s fostering their personal growth or guiding them toward financial self-sufficiency, that desire to help them get ahead burns brightly.
So today, I want to explore some simple, practical ways to help with their finances. Now, don’t get me wrong, this isn’t about setting up some incredible inheritance (though if you can, that’s amazing!). This is about small, achievable habits that can make a huge difference over time.
The Power of Just $1 a Day
It sounds incredibly simple, but let’s explore what happens if we help our child put aside just a single dollar every day for the next 20 years. We’ll look at three different scenarios to see the impact.
- Scenario 1: The Safe and Steady Path. Putting $1/day into a high-interest savings account at 4.5% interest would grow to approximately $12,640.
- Scenario 2: The Growth Path. Investing $1/day in an ETF tracking the ASX200 with a historical average return of 9.2% would grow to approximately $22,614.
- Scenario 3: The Piggy Bank Path. Saving $1/day in cash with no interest would result in $7,300.
Disclaimer: Savings account interest rates and average returns are all estimates and no doubt will change over time. So don’t be too welded to these numbers, just know that its better than doing nothing at all!
A Closer Look: The Year-by-Year Breakdown
To show you exactly how the magic happens, here’s a table detailing the growth at the end of each year. You can see how the gap between the methods starts small but widens dramatically over time.
| Year | Piggy Bank ($) | HISA at 4.5% ($) | ETF at 9.2% ($) |
| 1 | 365 | 381 | 399 |
| 2 | 730 | 780 | 834 |
| 3 | 1,095 | 1,196 | 1,308 |
| 4 | 1,460 | 1,632 | 1,825 |
| 5 | 1,825 | 2,088 | 2,390 |
| 6 | 2,190 | 2,567 | 3,008 |
| 7 | 2,555 | 3,070 | 3,685 |
| 8 | 2,920 | 3,598 | 4,428 |
| 9 | 3,285 | 4,153 | 5,245 |
| 10 | 3,650 | 4,737 | 6,147 |
| 11 | 4,015 | 5,352 | 7,143 |
| 12 | 4,380 | 6,000 | 8,245 |
| 13 | 4,745 | 6,683 | 9,466 |
| 14 | 5,110 | 7,404 | 10,821 |
| 15 | 5,475 | 8,164 | 12,324 |
| 16 | 5,840 | 8,966 | 13,993 |
| 17 | 6,205 | 9,812 | 15,846 |
| 18 | 6,570 | 10,704 | 17,901 |
| 19 | 6,935 | 11,646 | 20,178 |
| 20 | 7,300 | 12,640 | 22,614 |
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Note: Calculations are based on adding $365 at the start of each year and compounding annually.
The Two Most Powerful Ingredients: Time and Compounding
As you can see, even in the worst-case scenario, saving over $7,000 from just $1 a day is impressive. A week’s worth of savings is just the cost of one expensive coffee!
But what’s truly powerful here is the impact of compound interest. It’s the engine that turns a small amount of money into something substantial. And the fuel for that engine is time, something your child has in abundance, especially if you start early. Let’s break down those final numbers:
- HISA: You contributed $7,300. The bank gave you $5,340 in interest.
- ETF: You contributed $7,300. The market growth gave you $15,314.
That is free money earned simply by letting your initial savings work hard over time. The numbers start small, but they grow, and then that growth starts to grow. It’s a snowball effect that can give your child a massive financial edge when they grow up. Imagine if you added an extra dollar or two whenever you could spare it! The number would just get bigger and bigger!
An Important Disclaimer
Before you rush off to start, a quick reality check. This information is for educational purposes and is not financial advice. I am by no means a qualified financial adviser, so please do your own research before kicking off this endeavour. Be aware of a few things:
- Interest rates on savings accounts go up and down. Review your account regularly to ensure you’re still getting the best rate, or at least a reasonable.
- The 9.2% annual growth for the ASX200 is based on historical data over the last thirty years. Past performance is not a reliable indicator of future performance, and investments can go down as well as up. However, with sufficient time, and we are talking years of time here, you will be able to ride the ups and downs of the share market rollercoaster.
- That said, almost any strategy involving interest or investment is highly likely to be better than just using a piggy bank! Though I do have to say, piggy banks can sometimes be quite cute!
Bonus: More Than Just Money, It’s a Life Lesson
This isn’t just a saving exercise, it’s a teaching opportunity. This might be too complex for a baby, but for a four or five-year-old, it’s perfect. You can walk through the plan with them, watch the numbers grow together, and explain the core concept of saving. If you want to buy something in the future, you save up for it. This is the discipline we want to instil into them from an early age.
The benefit of this lesson is immeasurable. Financial literacy is a critical life skill. Using this simple plan to instil an understanding of how money works is a gift that will last a lifetime, and is probably worth more than the actual dollars you save for them.
Join the Conversation
We would love to hear from you. What are your thoughts on saving for the next generation? Do you have any great tips or family traditions that have helped your own kids become more financially savvy?
Please share your ideas and experiences by leaving a comment below or getting in contact with us. We’re always interested to learn what works for other families!
