The concept of the Latte Factor is one of the most divisive issues in personal finance. Money gurus get so worked up over whether the Latte Factor is a valuable lesson in money management that one might think the issue were as important as war, the national debt, or capital punishment. Most of the time, passionate responses pertaining the the Latte Factor is based more on book sales and pageviews than any rational consideration of the issue.
The Latte Factor, a term coined and trademarked by financial author and guru David Bach, posits that small, repeated savings, of which people can make habits, can aid the growth of wealth over time. The math bears this out to be true: Assume you spend five dollars every weekday on a fancy coffee-related drink on the way to your office. If you cut out the coffee or replace it with a $1.50 less-fancy drink, you save at least $20 a week or maybe a $1,000 a year. Put that money in a bank or invest it, and assume you can earn a return from interest, dividends, or investment gains, and over the next ten years you’ll have $11,000 to $16,000 more to your name than you would have, had you continued buying your daily gourmet drink.
This concept isn’t limited to expensive coffee-related drinks. Any habits that result in spending money that could be deemed unnecessary can qualify for elimination due to the Latte Factor. Cook your own food rather than dine out once a week, and you could save just as much money or more over the same period.
Most people, however, don’t bridge the gulf between reducing spending in one area and increasing savings with the difference. Unless there’s a concerted, conscious effort to transfer money from a checking account to a savings account or an investment, the money formerly spent on lattes or other repeatable expense will just be spent on something else.
Furthermore, families that have already reduced their spending due to tough economic conditions that have become personally relevant may not have much room left to scrape the barrel to find additional savings.
Yet another criticism of the Latte Factor is that it minimizes the importance of reducing large expenses. If a family gets into the habit of saving money ordinarily spent on lattes and uses that attitude to justify buying a more expensive car, all the work will have been for nothing.
Well — the work would have been for a more expensive car. All spending is a choice. It’s easy to remember this when a friend refuses to spend time with you, citing the expense of the activity, while they continue to purchase unnecessary electronics equipment, for example. You can identify someone’s priorities by looking at how they choose to spend the money they have and the time they have available. If you look at your own priorities, your budget should match.
Whether you realize it or not, you’re broadcasting your priorities to the world, but mostly to yourself, by spending money and time in one area of your life at the expense of another area. If there’s incongruence between the priorities you think you should have and how you spend your time and money, consider changing something or accepting the idea that your priorities may not be what you expect. Your real priorities are evidenced by how you spend your limited resources.
If the pick-me-up and self-esteem you receive by drinking a latte in the morning is important to you, and you realize your habit results in a hypothetical “loss” of $10,000 or more over the course of ten years, spend the money. Buying a practical car that requires little care, uses fuel efficiently, and will last a long time can save money over the course of several decades, but if buying a less practical car makes you feel happy and won’t be a financial hardship, even if it means leasing a new car every three years, then go ahead. Your spending reflects your priorities.
I see this in my own spending. I still drive my old Honda Civic. In one respect, I haven’t purchased a new car because I see it as an unnecessary expense and I’m comfortable with keeping the money I would need to buy a new car in my savings account. Meanwhile, I spend money on things other people would see as frivolous, such as photography classes and equipment, hiring a maid service for my apartment on a bi-weekly schedule, coin collecting (though not much recently), and travel.
Is the Latte Factor relevant to your personal finance experience? What does your spending say about your priorities? Relevant responses to this article are worth twice as many points as usual. If you are a registered Consumerism Commentary visitor, you can earn points by participating in discussions to redeem for Amazon.com gift cards.
Photo: RaeAllen
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It may be true that the reason many Americans do not save for retirement is ignorance. There are typical excuses for not saving for retirement, such as the lack of good, seemingly trustworthy information about the options that are available, the lack of knowledge about the benefits of investing in 401(k) plans and IRAs, or the belief that during tight personal economic times, not a cent is available to save for the future. After the recession, however, many people just see the financial industry as unworthy of trust. Organizations like LIMRA, working for the industry and promoting financial products, are unlikely to bring this attitude to the public attention.
This FDIC benefit is scheduled to end before January 1, 2013. The expected reaction is for small businesses to take their operating funds out of community banks and return to larger banks, where size is assumed to correlate to strength. Small banks, which have recently begun extending more credit to local businesses, will no longer have the funds to continue this practice. 
Thanks to the Consumerism Commentary Community
This article was written by Flexo in Administration. 13 comments.
In just a short period of time, Consumerism Commentary will be entering its tenth year of existence. The site’s ninth anniversary is approaching, and I’ve been involved with the website longer than I’ve been involved with any other commitment in my life. Jobs and relationships have come and gone, but Consumerism Commentary remains.
I started the website in an effort to track my personal finances at a time when I was struggling financially, though I had already started a new path towards financial independence. Thanks to the readers early on who believed the website offered something unique, the growth of the community has been nothing short of amazing. Consumerism Commentary has changed character a little bit from those early years, when a blog was more about short, quick chronological updates and about sharing links to other interesting things found online. Last year, I solidified the website’s vision, mission, and purpose. While the owner of the site is now different, not much else has changed, and there are no plans to change anything in the near future, except for perhaps a more professional-looking logo and site design.
Thanks to all the readers who have continued to visit this website since 2003, our fans and friends on Facebook, and particularly those who continue to participate in discussions today. Thanks also to all the colleagues who have offered their advice and encouragement, and a big thanks to Jay Frosting (also known as Bryan J Busch) and Tom Dziubek who have held down the podcast fort for several years.
And if you’ve encountered any technical issues with the website recently, please continue to bear with me as the technical team continues to work out the bugs.
Last week, my article about The Rich and the Rest of Us by Dr. Cornel West and Tavis Smiley attracted the attention of the two men, and I’m working on scheduling an interview with the pair later this week. They are crusading across the country to elevate the issue of poverty and potential actions to move the United States is a better direction towards resolution. Do you have any questions for Smiley and West?
There are five types of purchases — well, more than five but these five are big — you should never put on your credit card. Every purchase you make is tracked by your credit card issuers and can be used against you if the companies decide you’re a higher risk than they originally thought. And they can change your risk profile based solely on the types of stores you visit.
The Carnival of Personal Finance hosted by Musings of an Abstract Aucklander last week included my article about Sprint’s $300 million tax fraud lawsuit.
Adrian from 7 Million 7 Years talks about how it may be hard to believe that someone in New York struggles on an income of $350,000 a year, but he understands the perspective. Andrew Schiff, who works for a brokerage firm, earns this salary but “feels stuck” according to an article in the Wall Street Journal.
Mike, the Oblivious Investor, argues that even an individual with a reduced life expectancy should wait as long as possible before collecting payments from Social Security. There are some specific circumstances in which it might be beneficial to claim Social Security benefits early, however. Mike explains within the article.
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