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Three More Invalid Criticisms of David Bach’s Latte Factor

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I recently appeared on the Stacking Benjamins podcast to talk with Joe Saul-Sehy about the Debt Avalanche and the Debt Snowball, two very similar methods of paying off existing debt — usually applied to situations that involve mutiple credit cards. They two approaches differ in one important aspect, and I’ve discussed that in detail on Consumerism Commentary.

You can listen to that podcast episode here. We go beyond the details of debt payoff and discuss the mindset that comes about from being hopelessly devoted to gurus and strong personalities. And one thing that comes out of this mindset is that everyone who disagrees with your particular guru is wrong, doesn’t “get it,” and is jealous of the guru’s success.

I’ll call out experts I disagree with, but when I also find myself leaning towards certain advice, I’ll point that out as well. Gurus, even the most persuasive, can be wrong, and the same gurus can be right. It’s not that all strongly-opinionated authors and seminar leaders are providing bad information, but the nature of these communities is based on groupthink. People lose the ability to make decisions for themselves and see the subtlety in personal situations that destroys the relevance of one-size-fits-all prescriptions.

One thing that I’ve concluded, at least thus far, is that some criticisms of one author’s approach to building wealth, David Bach’s Latte Factor, are unfounded.

I wrote about two invalid criticisms of the Latte Factor yesterday — that time is better spent earning more money than saving money and that frugal people have already succeeded with the Latte Factor but have nothing else to gain from the advice. Today I’ll continue with two more criticisms I find to be incomplete.

3. The purpose of money is to spend it on things that make you happy. If that’s a daily cappuccino, so be it.

First, I’ll take a look at this criticism from the coffee-literal perspective.

Ask someone who relies on a morning latte to get through at least part of the day with their sanity intact, you can imagine the drink is something about which he’s not likely willing to compromise. But maybe having cheaper coffee at home would help him maintain a positive attitude through the morning while avoiding the $8 drink at the name-brand coffee shop.

Perhaps there’s a social aspect to getting coffee at the same shop every day, but if that’s the case, the drink isn’t the important part and can be easily switched with, say, a cup of water. It may just be the fact that you have a daily routine that maintains your happiness, and changing that routine might be difficult at first but will easily become the new normal.

Now, here are my thoughts on this criticism taking a more generalized perspective to the Latte Factor.

There’s no point in improving your bank account balance if you don’t have any ideas for what you’d like to do with your life. Money is not a goal by itself. When you know what the purpose of your money is — some type of legacy you want to leave on the world — you are more inclined to think about your financial choices carefully and make decisions that provide better results in the future.

Happiness is an important piece of long-term goals. And spending money on experiences, not things, is a more efficient of spending money when happiness is concerned. Most people should better understand that happiness is a choice, not an ultimate goal. In fact, happiness comes through the little things in your life on a daily basis, not a state of being that won’t be realized until some other condition is met (such as having a high net worth.)

The idea that happiness is a choice might come close to the same danger I illustrated yesterday, how living situations can be overwhelming to the point that not much philosophical change is possible, but regardless you don’t need a daily coffee to be happy.

The idea that one should continue spending money because it makes one happy is a convenient excuse that allows people to feel better about making bad decisions.

4. Most people who try the Latte Factor aren’t successful.

This is probably the most ridiculous criticism of anything, let alone the Latte Factor. It’s crazy for people to believe they’re better than average or can be more successful than average. And I pointed that out when I wrote about the chances of being a successful entrepreneur earning $10 million from something that starts as a side business. It’s possible, of course, but it’s not common.

But that doesn’t mean you shouldn’t try. Princeton University’s acceptance rate in 2012 was only 8.2% of all applicants. And it’s safe to assume that most of the high school students who bother to apply for Princeton University are already highly qualified to attend. That doesn’t mean that if you are qualified you shouldn’t apply because the chance of acceptance is so low. It’s not that difficult or complicated to succeed at reducing daily, habitual expenses, and by looking at the idea as a philosophy instead of a rule, the concept becomes a part of your life and invites success.

Find internal motivation and you won’t give up.

5. By the time you realize the great savings over a long period of time, inflation’s effect will make that money not worth nearly as much as its sounds today.

There’s some disagreement about how much the Latte Factor can actually save someone. We can easily calculate and define the savings amount on an annual basis, but beyond that, there are too many variables in play for anyone to make an informed decision based just on numbers. If you could save $5 a weekday by avoiding expensive coffee, a trip to Wendy’s, a pack of cigarettes, or some other expense, you’re looking at $25 a week or $1,250 a year (50 weeks). Over twenty years, that’s $37,500 saved.

That’s about where the facts end. You can assume that the $1,200 a year is invested on a monthly basis in a broad stock market index mutual fund in an IRA, the investment increases each year by 3% inflation, and the investment ends up earning an annual rate of 8%, a pretty average for the stock market. With all of those assumptions, your ending balance will be more than $220,000 after 30 years. That sounds great, but inflation eats away at the purchasing power of that money, so $220,000 30 years from now could be equivalent to $97,000 (a figure I determined by using the Bureau of Labor Statistics inflation calculator to compare 2014 dollars with 1984 dollars).

The assumptions are aggressive and leave holes in the calculation:

  • What are the chances that someone will invest all the money they save through the Latte Factor?
  • What are the chances he won’t need to withdraw money from the stock market during an economic downturn?
  • Is the daily “latte” (or whatever the habitual expense might be) just being replaced with another unnecssary daily expense?

There are too many variables to be able to make a prediction. It also doesn’t take into account the positive effect on other areas of your financial life by implementing the Latte Factor. In fact, the calculated savings might be too conservative — that is, you’ll save even more money than the calculation expects — if the philosophy helps you make better, informed decisions about money.

The important point is this. Even if you end up with $100,000 in your “Latte Factor” bank account at the end of thirty years, that’s $100,000 you wouldn’t have had otherwise. And while being successful with a business might generate $1 million, $10 million or more over the same amount of time, there’s no reason you can’t pursue that at the same time you’re being smart about your own finances. And I hate to disagree with the “You can do it!” entrepreneur coaches, but the chances of being successful in business at that level are quite low.

I don’t think any Latte Factor supporter has ever said that the concept of cutting back on habitually repeated expenses is the sole key to building wealth over the long term, but most of the criticisms assume that the philosophy is prescribed as the definitive solution, and those who follow it aren’t capable of taking a multifaceted approach to improving their finances, whether those financial goals include getting out of debt or reaching financial independence. No, $100,000 thirty years from now is not going to make anyone financial independent. That doesn’t mean the Latte Factor fails — it addresses a different concern.

That is the big assumption that drives the criticism. The Latte Factor is a simple concept, but it’s only one part of a larger philosophy. This is just a small part of the fact that people spend money and time on what’s important to them. When people say that saving money or earning more income is important, but spend no time or mental energy working towards those goals, their words disagree with their actions. It’s those actions that matter, like everyone knows.

If you want to be financially independent, but aren’t considering all avenues for reaching that goal, including reducing expenses and earning more money, then you don’t really want to be financially independent. You don’t really want to be out of debt. Or you don’t want these things enough to actually make changes in your life. Everything good is worth sacrificing for.

There may exist legitimate criticisms of David Bach’s Latte Factor. It’s not applicable for all people in all situations, certainly. But these five criticisms come from a misunderstanding of the goals of this frugal approach, bad assumptions inherent among some individuals who implement the advice, or incorrect expectations about the results.

Photo: Flickr

Published or updated April 21, 2014.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 5 comments… read them below or add one }

avatar 1 Anonymous

Hi Flexo. Thanks for this discussion of the Latte Factor. David Bach is the first personal finance expert I read when I was being sliced and diced by my bills, and I followed the steps Bach spelled out in the Automatic Millionaire to climb out of debt. While some of the critics of the Latte Factor have valid points, most seem to miss the point that the Latte Factor is a metaphor. Other naysayers seem to be critiquing Bach less so out of any valid point and more so out of trying to build credentials/followers. Bach worked for me, but some friends of mine found that Dave Ramsey’s advice suited their satiation better than Bach. Each one of us will have a slightly different personal finance journey depending on whose advice we follow or reject (e.g., Flexo, Suze Orman, David Bach, Dave Ramsey, Jean Chatzky, Mr. Money Mustache), but I am in a better place financially by skipping the latte and pocketing the money. I guess the point is to read, think, adopt, and adapt, and you’ve done a good job through the years of asking your readers to do just that. Keep up the good work.

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avatar 2 Donna Freedman

I can’t think of a SINGLE way to wealth, unless it’s to be born into it. While the phrase “Latte Factor” sets my teeth on edge, the fact is that unless we examine spending habits then our money probably isn’t working as hard as it could. By tracking expenses we can figure out where the money is going — and more to the point, where it ISN’T going.
I sometimes hear people say they can’t afford to save for retirement. Maybe that’s true. Or maybe it’s that they aren’t willing to give up some current treats (new smartphone every six months, high data plan, lots of meals out, shopping trips, sports tickets, whatever) to make retirement a priority.
Every dollar you choose to spend on a latte (or whatever) is a dollar that can’t work for you. Yes, money buys treats as well as necessities. Think of it this way, though: Money buys OPTIONS. You can’t quit your job to stay home with a baby or start a business if you’re mired in debt and have no savings.
Thinking ahead — “Where do I want to be in five years? How can I use money in a way that will support that goal?” — could mean the difference between being able to do what you want to do and doing what you MUST do as a consequence of a lack of planning.

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avatar 3 Anonymous

Daily coffees from the shop and lunches out were regular for me. Now that I’ve given those up as routine, they bring me genuine enjoyment when do I have them. The coffee tastes miraculous, but often the meals I have out pale in comparison to the ones I’ve since learned to make at home. (You come to realize just how greasy most restaurant food is!) Anyway, when the coffee or food I have at a restaurant is good, man, do I enjoy it. It brings me happiness. But before, it wasn’t happiness–it was routine. That takeout coffee isn’t as good when you have 3 a day. It’s just normal. Pilsner Urquell is my favourite tasting beer in the world. Do I feel the need to drink it every evening? No, it would dull it down and make it common.

Something I never understood about the anti-latte aggressors (“I could never give up my Starbucks!,” “I love my cable, no way I’m getting rid of that!”) is the seeming finality of their thought. …Like if they give up Starbucks they’ll never be able to have it againin this lifetime as bound by a universal evil law. You can try not having something and, if after a week or two, you miss it too badly you can start doing it again. No loss there. When I started plugging and cancelling all the little leaks in my spending, I found that after 4 months there was a monthly Internet subscription service which I still really missed, so I signed back up. Most things I ditched (café, restaurants, cable, DVD shopping) I not only didn’t miss at all but surprisingly Good article!

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avatar 4 Donna Freedman

This plus 100000…. I hear people say “Well, I need to have SOME fun in life” — as though they could never have fun again if they did without 200 channels for six months in order to attack debt. Or, as you noted, that they couldn’t ever have that latte again.
Ditto on the way things feel once you’ve done without them for a bit. An occasional piece of chocolate tastes hedonistic if you’ve stepped away from the sweets for a while. Some people say they’d rather have one really good piece of chocolate per month than a Hershey bar every day.
Full disclosure: I love Hershey bars. But I love them more when I haven’t had one in ages.

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avatar 5 Anonymous

You’ve hit on an important issue: it doesn’t have to be forever! When counseling clients, I often suggest they cut back on a particular category “for a few month.” I am surprised at the intensity of reactions. I *think* that we all know that it isn’t going to kill us to eat more frugally for a month, or put off that haircut for two weeks, or whatever. Apparently, it seems that way to some.

Not that I am perfect, by any means. But I hope that I am willing to look at my financial choices with a reasonable eye.

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