The concept of the Latte Factor is one of the most divisive 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 the national debt. Most of the time, passionate responses pertaining to the Latte Factor are based more on book sales and page views than any rational consideration of the issue, though.
The Latte Factor is a term coined and trademarked by financial author and guru David Bach. He posits that small, repeated savings — of which people can make into habits — can aid the growth of wealth over time. The math supports this as truth: Assume you spend five dollars every weekday on a fancy, coffee-related drink on the way to your office. Now, imagine you cut out the coffee, or replace it with a $1.50, less-fancy drink. You would save at least $20 a week, or about $1,000 a year.
Take it a step further and put that money in a bank or invest it. Then, assume that you can earn a return from interest, dividends, or investment gains on that cash. Over the next ten years, you’ll have somewhere in the neighborhood of $15,000 more to your name than you would have, had you continued buying your daily gourmet drink.
Take it a step further
This concept isn’t limited to expensive coffee-related drinks, though. 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 dining out once a week, and you could save just as much money (or more) over the same period. Cut out your premium cable package in exchange for Netflix or Amazon Prime streaming, and tuck that cash away.
Most people, however, don’t bridge the gap 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 often just be spent on something else.
Furthermore, families that have already reduced their spending due to personal or economic situations may not have much room left to scrape the barrel. Finding additional savings can be too much to ask.
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 naught.
Well, I take that back: the work would have been for a more expensive car. But, in my opinion, there are about 100 better uses for that extra, squirreled cash.
Do what works for you
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. Spending money and time in one area of your life, at the expense of another area, is really all the evidence you need. If there’s incongruence between the priorities you think you should have and how you spend your time and money, consider changing something. Or maybe, you need to accept the idea that your priorities may not be what you expect. Your real priorities are evidenced by how you spend your limited resources.
So, what if the pick-me-up you receive by drinking a fancy latte in the morning is important to you? As long as you realize that your habit results in a hypothetical “loss” of $10,000 or more over the course of ten years, spend the money. Sure, 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.
Just remember, though: Your spending reflects your priorities.
I see this in my own spending. For example, 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. I’m more than 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 basis, 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?
Updated February 3, 2017 and originally published February 1, 2017.
{ 16 comments… read them below or add one }
One of my priorities is cooking fresh, homemade meals for my family. Since I gave up most convenience foods, our grocery budget has plummeted. We used to spend about $80 a week on food (for a household of three). Now it is closer to $45 a week.
Ceecee,
That’s one area of my life that needs improvement. I know I could save money by cooking more often, but I’m just not a big fan. I could say that my time is better spent doing other things, but I’m aware that it’s just an excuse.
I can see both sides of the coin. On one hand, focusing on your spending on “trivial” expenses like lattes allow you to examine where it is your money is actually going. I think a lot of people dismiss the idea simply because it’s a few dollars here and there but I do see the significance once added up. On the other hand, I also agree that only focusing on cutting these little expenses may not be the best use of your time. Learning to attack the big areas in your financial plan like salary, savings, and investing can yield disproportionate results. The so-called “big wins.” Personally, I like to embrace both lines of thinking since I don’t think they’re mutually exclusive. Identifying your budget leaks (even trivial ones) while expanding your income for example can accelerate your goals. But for any particular person, being comfortable with just doing one side is better than not doing anything at all.
Couldn’t have said it better. If you want to find out someone’s priorities, look at their credit card statement. No matter what people SAY is important to them, people truly need to start putting their money where their mouth is. I try to line up my financial priorities with my verbal priorities. I actually just wrote a full series on budgeting that started with writing down a list of priorities, because that will help guide where your money goes. If you don’t spend money on the things that are important to you, then you are just wasting it as a tool.
Good post!
My “latte” is a coffee once or twice amonth, but I have no debt (except a small mortgage) and max out my 403B, IRA and Roth IRA. Sometimes you just need a frivilous expense! I drive an old car (18 & 16 y.o.) car too. It could last forever, but I would like a new(er) car. My priorities are good and Ihe jury is still out about the car.
I agree that most people who quit buying lattes will not actually save the money and will probably just spend it on something else. If the money from the latte factor was put into retirement or long term savings account I could see it as a valid argument. However if someone is very successful financially and the only money they spend on themselves is their daily latte I don’t have a problem with it.
My spending habits generally say that I’m very cautious about unnecessary purchases. When I do spend, I want to enjoy it fully.
Example: I’m spending a couple of months in Alaska, house-sitting and hanging out. Twice so far I’ve gone to a midnight movie with a friend. Not frugal, but lots of fun. I’ve also gone out to eat with her two to three times a week, which is VERY unusual for me. For the enjoyment we’re getting out of it, definitely worth the expense.
I plan two more trips this summer and will attend the Financial Blogger Conference in September. In between, I want to keep costs as low as possible in order to meet the travel/vacation expenses in full while continuing to meet financial commitments (saving, retirement, et al.).
My frustration with the Latte Factor advice stems from the fact that most people who are looking to save more money already know that they should watch their “small” purchases (although I would claim that a daily $5 cup of coffee isn’t that small). There is a similar kind of advice in fitness articles– where they tell you cutting out a single pat of butter each day will result in a ten pound weight loss over a year. But again, if you’re reading this kind of advice, you already avoid butter/expensive coffee every day. I think this kind of advice is popular on the part of the writers because it makes it look like a painless change will make a huge difference through the power of mathematics. But the sort of individuals who are mindlessly spending their money (or calories) on lattes/butter are not the ones who are looking to improve their finances/fitness level. Once you have committed to spending or eating mindfully, this advice becomes pretty much useless.
The real issue in the Latte Factor is there is a lot more at work that it is unlikely that someone is able to make a “small” change. There are so many interconnected threads that giving this advice is hard to validate. For instance someone entering retirement this year or last year may be taking a loss on their money. The examples always use some theoretical return because nobody can know what your actual return will be on this latte money. Someone with different data or personal bias will be equally justified in saying you should be drinking that daily latte. If 20 years down the road you find out that your latte would have prevented you from getting a certain currently unknown form of cancer you are better off drinking that latte.
For the fitness comparison remember that there are two sides and an edge to every coin. Compare low protein (some vegans), low fat, and low carb (atkins) diets. All three have helped people lose weight.
What may come of drinking the latte. An interaction with someone you would otherwise never have met. That could lead to love or new business opportunities. That new job might be worth more to your finances than the lifetime cost of your lattes. There are so many variables in play you can only decide what you feel might give you the best chances.
Maybe drinking that latte is best for your finances after all.
Nice article Flexo, in my opinion dining outside is not bad but it should not be on regular basis, if one can afford he/she should go for lunch/dinner just for change but it shouldn’t become daily routine. No one can deny the importance of savings rather one should go for outings after one has saved enough for the bad times.
I found out first hand about the Latte Factor a few years ago. We cut out a lot of our discretionary spending and was able to pay off our house. And I agree that if you look at where your money is spent you will see your priorities. At work I have several outfits that I wear and mix and match them so I do not spend a lot of money on clothes. However, look at our house and you will find that we are having our bathroom remodeled. We spend time in the yard keeping it up. We have also saved so that we can take a trip to Alaska this year. SInce I do like movies and magazines I have found alternative ways to fit that in the budget through Coke Rewards. I get the rewards from our church when we have activities. They bring them to me and while some may laugh at me I will gladly spend the time each week to enter the codes. That way I get the tickets and magazines free. With some hard work and ingineuty we can manage a lot more than we think we can.
You have to sweat the small stuff AND the big stuff. And furthermore you have to focus on actually saving the money that is freed up, and increasing your income. It can be hard to juggle all those various focuses, which is why automation is key. Also to me the point of The Latte Factor is not just how much you can save with one small change, but how much you can spend with one small daily habit. A habit is like automation for your self; something that gets done (for good or ill) without conscious action on your part. So you can first focus on replacing an expensive daily habit with a different habit (daily latte with making your own coffee); then you can focus on automatically transferring that to savings. Now you’re free to focus on another habit, on increasing income, etc.
Well said. With awareness of your habits, you can make them work for you, rather than allowing your habits to affect your life negatively. Humans are creatures of habit, they say, so use that psychology for your benefit by creating positive habits.
Well said! I don’t think people realize how much these little purchases add up.
I recently witnessed a woman I know buy a coffee in the morning, go to an expensive yoga class, pick up another coffee and a bottle of water afterwards while driving around in a huge SUV. She later hit a drive through for lunch. The key is that this same woman complains about not having enough money, but she focuses only on the big things and feels entitled about the little things. Simply tracking these small expenses and just being aware of the “latte factor” would be tremendously helpful to her. I think another great example is buying books instead of using the library.
Confession: I’m a latte addict, but I make mine at home. :)
My spending absolutely reflects my priorities. I vote with my wallet. I’ve never been one to buy expensive coffee drinks or beverages at restaurants, so I can’t really save in that way. Some months we go out to dinner 2-3 times, but we also might not do that at all for a couple of months. When we recently moved, we found that there is a Dutch Brothers Coffee very nearby – it is a drive-through fancy coffee place, and very popular. I have no reason to go there, and primarily that is because we live at home and drink our coffee at home. If we had standard jobs or commuted, something like that might be relevant. This is significant to my thinking, because standard employment costs money – money that we don’t need or want to be spending.
Your point that money “saved” will just be spent on something else reminded me of my good friend, who when she inherited some money, chose not to pay off her house. She said they’d just spend that mortgage money anyway, on something else. When I hear a statement like that, I am baffled at the thinking behind it! And then I think, some people just don’t care to have money and are uncomfortable having it. The story of a lottery winner’s life!
Most of our discretionary spending is not on small things, and is not repetitive spending. I want value for the dollar. Also, because we do work, one of us a more ordinary job, our lives mostly revolve around the work schedule. We don’t have the time or energy to spend money very much (other than online ;) ), and I really think that trying to keep up with certain activities/luxuries is nothing but stressful. What we like is the idea of having nothing to do, for a change. And even more fabulous, the idea of retiring. But then, how fab will that be? We’ll have time to live, but not the money coming in to do it!
I get antsy when I have nothing to do. Well, I always have something to do, so I can never truly make that excuse. Even when I’m taking time to myself, there is always something I *could* be doing — mostly surrounding working of some sort. I always have more to do to improve this website for instance. My work is never over… and that’s OK because I enjoy it. Though if I were to have a family, my priorites may be different.