You all have seen the savings of cutting out that one cup of Starbucks per day, but I haven’t seen anyone plug this savings into an annuity equation, so I give you here what could happen.

Here are the assumptions:
$5 per cup of coffee (Latte with flavor),

Purchases are made only Monday through Friday, at 1 cup per day.
5% APY (I’m assuming a high yield savings account).

An estimate of the future value (fv) of money can be easily calculated in two ways:

For a single deposit, earning interest at a constant rate, use this equation:

For an annuity, that is a fixed amount deposited at regular intervals (derived from annual, but can be used for smaller intervals), can be calculated with the equation:

So, what do those letters mean?  Well, P is your deposit or principal, R is the rate of return and N is the number of times it’s compounded.

In this case, the total principal to be deposited is $5/day * 5 days/week * 52 weeks = $1300, an average of $108.33 per month.  The rate is about 0.42%… Wait I said the APY is 5%, so where’d this 0.42% come from… It’s the approximate monthly rate or MPY.  And of course, since we’re working with months and want to see the results from 1 year, the number of times compounded is 12.

So, with all this in hand, how much are we REALLY saving?

Let’s say for the sake of argument that the full $1300 was available at the beginning of the year and we deposited it all at once, then we’d have about $1366.51 (give or take a few cents, since these equations are only estimates).

Realistically, those of us trying to get out of debt can’t really afford to dump the full $1300 in at the beginning of the year, so we’d probably budget the $108.33 per month as an annuity for the year, netting $1330.21 by year end.

Converting either the annuity or single amount for partial or multiple years is as easy as changing N, but what about putting $1300 in once per year for X years?  Or just putting the $108.33 in for one year and then letting it sit?  Well, there is no simple equation, though you could plug the result of the annuity into the single time equation.  But converting the $1300 into an annual annuity with monthly compounding, not so easy.  To solve these and other problems, I WILL work on deriving equations that will make it possible, though it may take me some time and they won’t necessarily be pretty.

So, the moral of this exercise, don’t just cut the coffee, put the money into your high-yield savings account or for better potential returns, invest it.

While I will give full updates next weekend, I will also provide mini-updates, such as this one as my mini-goals are completed.One mini-goal complete and one half done.  During the school year our local library is open for a short time on Sundays, so I went and paid off my overdue fines and checked out not one, but two books.  The books checked out are A Million Bucks By 30 by Alan Corey and The ABC’s of Getting Out of Debt by Garrett Sutton.In Million Bucks, Mr. Corey describes how he worked a 9-to-5 job for six years and achieved a seven-digit net worth.  This book is copyright 2008 and was just added to my library’s collection this past Wednesday.ABC’s is part of the Rich Dad’s Advisors series and claims to describe how to “Turn Bad Debt into Good Debt and Bad Credit into Good Credit,” we shall see.  This book is copyrighted 2004.For more information or to purchase either of these books, please click on the appropriate Amazon affiliate link below.

Starting today, I will post 1 to 2 weekly mini-goals every Saturday or Sunday.  These goals will generally have something to do with my financial education and/or ability to attain higher net worth.  The following weekend, I will post what I did to achieve the goals and the results of those attempts.So, without ado, I present this weeks goals (3 this week):

1. Call the company of the credit card for which I have the lowest limit & balance, but have had the longest, and negotiate a lower rate (preferably in the 10-15% range).
2. Pay off my overdue fines at the library ($20), so I can begin checking out books again.
3. Check out a recent (2003 or newer) personal finance book (TBD) and begin reading it.