Are $14 Margaritas Breaking Generation Z’s Budget?

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Key Takeaways:

• Yes, small expenses absolutely do add up. 
• However, for many people, small expenses ultimately amount to rounding errors. 
• To make a meaningful budget impact, look at the things you pay most for. 

Last week on CNBC, Jim Cramer lamented Generation Z and millennial spending habits. 

He said young people need to be more frugal. On one hand, they complain about student loans and not being able to make ends meet. On the other, he sees them regularly spend money on “round after round of $14 margaritas” at the restaurant he owns in New York. 

The Margarita Effect? 

You might have heard of the latte effect. It has become personal finance legend, particularly among super savers. People who save huge percentages of their income – taking frugality to the extreme – so they can retire early. 

When you run the math on the latte effect, it’s sort of lame. 

$5 a day equals $150 a month and roughly $1,800 a year. Not chump change, but closer to a rounding error for most people doing okay or better with money. Plus, you might actually get something out of that morning coffee that makes you more productive. Whether it’s the caffeine, interaction with your favorite barista, or both. 

However, seemingly small expenses do add up. 

If you’re slamming four $14 margaritas a week, that’s $56, before tip and the food you probably ordered as well. 

$56 a week equals $224 a month and $2,688. Suddenly, your morning coffee and post-work margarita habits set you back around $4,500 each year. 

Where Do You Draw The Line?

If you barely make rent each month, it’s probably advisable to reduce or eliminate these ultimately unnecessary expenses. 

If you’re not hurting, you still might feel anxiety over the headlines. And, more precisely, what you notice, day to day, on the ground. Everything costs more. Housing prices are through the roof. We appear headed for a recession. 

You might feel the need to pull back to increase your sense of financial security if the – pardon The Juice’s French – shit hits the fan economically. Some of us – regardless of our financial health – find comfort in enhancing our position of financial strength during turbulent times. 

It can be psychologically comforting. 

Maybe cutting out the lattes and margaritas does it for you. 

However, you’ll get a bigger bang for your buck if you examine your most costly expenses. 

Housing And Transportation Can Really Wreck A Budget

The Juice wonders how many of the young people Cramer chides have more apartment or car than they need. 

Consider this super realistic feeling hypothetical: During the stay-at-home portion of the pandemic, a 26-year old somewhere decided they needed a second bedroom to effectively work from home. 

Today, in Los Angeles for example, a typical two-bedroom goes for $3,212, up from $2,750 a year ago. As of June 2022, you can snag a typical one-bedroom apartment in LA for $2,383. 

Just comparing medians, if this person on the Generation Z/millennial border downsizes, they’ll save $829 a month. 

$829 a month equals $9,948 a year. Now we’re talking about a meaningful amount of money. Aim to rent below the median and we’re over ten grand savings. 

Run the same exercise on the monthly payment to drive a Tesla or Audi versus a Honda or Hyundai – same type of thing. 

The Bottom Line: It sounds sexy and convincing to rail on people who routinely drop $5 on coffee or $14 on cocktails. However, in a real-life budget, cutting these things out might not have much of an impact. 

If you’re looking to go bigger and realize meaningful savings, housing and transportation tend to be where most people’s biggest budget decisions lie. While it might require significant life change and sacrifice, downsizing where you live and what you drive can save thousands of dollars a year in an economy with scant good news in sight.

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