I first came across the idea of the Latte Factor while reading The Automatic Millionaire by David Bach. The Latte Factor essentially sums up one of the most important keys to attaining long-term wealth. It’s a popular phrase in the personal finance world, but it acknowledges a problematic American trait that continues to runs rampant in this country.
The Latte Factor basically states that small, wasteful spending over time gradually robs huge amounts of wealth down the road. For example, as the name suggests, millions of Americans make it a daily habit to stop at Starbucks and get one of those fancy lattes, mochas or cappuccinos without even thinking twice. Come on, what’s a trip to Starbucks every day going to hurt? Well, let’s run a few calculations and we’ll find out.
Let’s say you average $5 every day on delicacies such as lattes. That’s $35 a week, or $150 a month. Utilizing our good friend, compound interest, and stashing that $150 a month into index funds that average a 10% yearly return will really open our eyes to our spending ways. In 10 years, our latte savings will have grown to $30,727. In 40 years, by cutting back only $5 a day, we have accumulated over $948,000! Not bad, considering it was a laughably easy change to make. There’s no simpler way to add almost a cool million to your nest egg!
This principle can be applied to many different areas of our life: Unread magazine subscriptions, a dirty air filter, opting for generic brands, and ordering water in restaurants are just a few of the countless little ways that we frivolously let wealth leak away. For at least a few weeks, consider keeping a log of every single transaction that you make. It’s almost inevitable that there are small things that can painlessly be sacrificed and help boost your savings. Let’s say you do this and ruthlessly cut expenses that you really don’t need to be making and you eliminate $15 a day in unnecessary spending. Running the same calculation we did earlier, you would have accumulated over a million dollars in 30 years, and nearly $3 million in 40!
There’s really no reason not to let the Latte Factor and good old compounding interest work wonders for your personal finance!
3 users commented in " What’s Your Latte Factor? "
Follow-up comment rss or Leave a TrackbackHi Blake - You make some excellent points. First, you are correct, most people have no idea how much it really costs them to buy say Starbucks everyday. If they took the time to do some simple calculations, as you did, they would probably never step foot in a coffee shop ever again! Second, you highlighted the power of compounding interest, one of my favorite subjects. A 10% return is not that hard to achieve. I will gladly pass up Starbucks everyday at $5.00 a pop in return for $948,000 at retirement! Water please! Good work running the numbers, now if we could only get people to listen….
This is a cool post. I like the idea of cutting out some random expenses like coffee. I personally don’t drink coffee everyday, but I do buy lunch everyday. You might think that’s an unnecessary expense, but for me it’s cheaper, and I am paying for the time. There is a huge debate there that I won’t get into.
That said, my basic theory of money is that we have it to spend it. What’s $948,000 dollars going to get you in 30 years? You wouldn’t even be able to buy a house for that much in 30 years. Cutting out unnecessary things in life will definitely save you money, I agree that’s good. Why not cut out everything, then we would all be rich! It’s those little things that are more than necessity that make people happy. Money is worthless until you spend it.
I respectfully disagree with Paul’s theory. Having accumulated savings provides peace of mind and greatly reduces stress. Knowing that your world will not fall apart every time life throws you a curve ball offers a degree of personal comfort that no amount of spending could ever achieve. In my opinion. And obviously, $948,000 will have significantly less buying power in 30 years. But this savings was achieved with five bucks a day. Increase your savings to several hundred or several thousand dollars a month and you will be able to relax in peace on the beach somewhere in 30 years, spending to your hearts content. You reap what you sow.
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