The first personal finance book I read after graduating college was The Automatic Millionaire
Lately, I have seen a lot of criticism of the latte factor. Some argue about Bach’s math and how he calculates the amount you would amass by cutting out the daily latte. “Oh a latte doesn’t cost $5!” “The rate of return he used is too high!” And many argue that they don’t want to cut out their daily latte, that it wouldn’t make much difference, and that they’d be better off focusing on big expenses, not a $5 daily latte expense. One personal finance guru, who I respect, even said that he’d love to “catch” those who tout the latte factor at a Starbucks. I can just picture him seeing Bach or another latte factor supporter at the Starbucks holding a Venti Iced Vanilla Latte and yell, “I caught you red-handed! I knew you’d break down and buy a latte you HYPOCRITE!”
Critics of the Latte Factor seem to be taking the latte factor too literally. Nobody says that you can’t indulge in a latte once in a while. The latte factor is more of a metaphor to demonstrate that if we spend money on little expenses constantly, they add up. On the other hand, if we saved that money and invested it, the magic of compounding over years will give you a nice pile of cash. Many of the critics also argue that we should focus our energies on bigger expenses like housing and transportation, which are a much bigger proportion of our monthly expenses rather than waste time bothering with a $5 indulgence. While I agree that we should make sure that those expenses are reasonable, how often do you really have to spend energy on them. How often do you buy or rent a house? How often do you purchase a new car? Making sure you don’t buy more house than you need or a car that you can’t afford is important but it doesn’t mean you won’t have energy to focus on smaller expenses. You can do both!
The Latte Factor concept is more of a mindset where you are more conscious and intentional with your spending rather than buying latte, going out for lunch, getting a drink after work because, “hey it’s only a couple bucks, it’s okay” mindset. It’s not about deprivation and sacrifice. It’s about conscious and intentional spending. If you change your mindset and try brown bagging your lunch a few times or brewing your own coffee at home rather than buying it outside, you might find that this alternative option works just fine. It doesn’t mean that you are required to ONLY drink home-brewed coffee and that if you step into a Starbucks, you should be called a fraud by a personal finance blogger.
Small savings do really add up, but they won’t if you just leave it in your checking account. Most likely the money in your checking account will start to burn a hole in your pocket and there will be temptation to spend the money you saved by foregoing small expenses. Additionally, that money is not earning much if any interest. You need to invest it So start tracking your expenses and make a budget, which may include money for indulgences like lattes. Find what small indulgences that you can reduce or get rid of and make sure to have the excess money automatically sent to your investment accounts. I recommend using Personal Capital (affiliate link) to help with tracking your expenses and net worth.
Does cutting small expenses really make a difference? What small indulgence have you reduced or eliminated?
I wrote an interesting article on my blog about baby diapers…very similar to the latte factor you source (I wish I knew about the latte factor before!).
To summarize, I realized that by getting my daughter off of diapers 6 months earlier, and investing the $240 in savings for her in the S&P500 (average 10% returns over the last 20 years), that is $109,000 by the time she is around 60.
Granted it’s 60 years from now, and assumes a solid 10% over that time period….But the point is it adds up to a lot more than you would ever think.
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We’re still working on potty training!
I agree that the latte is just a metaphor for your own personal spending leaks. It’s really about spending money on what you value most. So hey, if that latte give you that awesome pick me up and makes you better at your job or whatever, then great! But if you have cable and never watch TV, well then think that through. I occasionally buy (just coffee) at starbucks totally guilt free!
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I still sometimes feel guilty but I get over it. =) As long as you have your finances in order, it’s okay to indulge once in a while!
As a non coffee drinker, I always viewed it but literally, but metaphorically, and think the concept is powerful. I do think the little expenses add up, and while you should still cut big costs where you can, being conscious of your daily spending habits does for things. For me, like you said, it’s not about deprivation but consciousness.
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Exactly, you can cut big costs and little expenses…it’s not like you have to just pick one.
“You can do both!” Exactly. And like you said, it forces you to rethink the way you spend money and hopefully use it in a way that means more to you. If I would’ve said, “eh, I’m not going to give up X expense because it’s so small and petty,” it would’ve taken me that much longer to reach various financial goals, and not because of the math, but because of that mindset–I’m not willing to prioritize my goals. At least for me, the latte factor helped change my perspective in a big way. Instead of thinking of frugality as a sacrifice, I started thinking of frugality as a choice I could make. And choices make you feel in control. That’s huge when you’re struggling with debt.
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Absolutely agree with that. When you think about what you spend on, it forces you to change your mindset and perspective. Love your statement about frugality not as a sacrifice but a choice….and that choices gives you control. Great points.
First, I want the latte in that photo! ^_^
I think that people take the latte factor to extremes. For me my latte factor is eating out, “$10 here, $20 there, it all adds up.” Suddenly you spent $200 eating out that month. :-/
Honestly, sometimes I think its our little spending that kills our budgets.
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Yes, I think little spending does add up. I have friends who have reasonably priced housing and car but still struggle with money. They do have many personal spending leaks though.
I agree completely!! Those little, seemingly non-sequential spends are exactly what got us into tens of thousands in consumer debt – we just had lots and lots of them. There were very few big buys that got us in the hole; just years and years of the Latte Factor. People often underestimate what those little spends can do to a budget, and that can turn out to be a massive problem.
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Thanks for sharing your own experience. Focusing on the big buys is important but when you have a lot of small buys, it can still get you into a hole!
We’ve cut back on eating out, and when we do we typically have some sort of coupon or deal, and we virtually never order drinks. The only time we splurge is when it’s a birthday or special occasion, in which case coupons and deals aren’t really a factor. I do think these small changes can have an impact over time. I also like to think of things as a challenge, though, like if you want coffee from Starbucks every day, find a way to offset that expense with additional income.
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Making it a challenge to find ways to offset that expense with additional income is a great way to allow you to have that indulgence. I think that might be in my next post…
Yeah I’d love to hear your thoughts on that. I do think that cutting expenses is much easier than making more money, but if you do both you are really setting yourself up for success.
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It interesting that I stumbled on this as I just wrote a post on my views of the latte factor.
I totally get the concept of saving a little bit each day and the power of compound interest and everything and I actually think the latte factor is a great way to build good saving habits.
However, my goal is more about the ‘net effect’. If someone saves $4 a day from not getting their latte and then decides to finance a vehicle at $500/month+, where is the savings really.
Many millennials are starting out late financially in life because of too much schooling and student loan debt. Many, including myself did not have the foresight to save $5/day from the age of 18 or 21. So to make up for lost time and an every increasing cost of living in a time where incomes are stagnant, we must increase our savings rate.
The latte factor is a great way to build the ‘muscles’ needed to save like a pro, but it can’t end there….in my opinion
You’re right that saving $4 a day on lattes won’t do much if you’re spending too much financing a vehicle. But I don’t see why you can’t do both! I think, like you said, the latte factor builds those savings muscles and often those muscles will translate to bigger purchases as well. Someone who is intentional and conscious with their spending with small expenses will likely do the same when it comes to bigger purchases as well.
It’s both yes and no for us. There are times, especially during the summer when we will go out for treats, or come home from work tired and get a cheap meal. When in reality, making a home cooked meal and having a dessert of fruit would not only save our waistlines but also our pocketbooks. But we know that life is short and that in October we will be cursing ourselves for not really enjoying our short summer while it lasted. It’s all a happy medium.
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Yea, that has happened to us as well. I’m fine with paying for conveniences sometimes so that I can enjoy my time with my family. I don’t regret spending for those things that give me more time to do what’s important. But for things that really don’t add much value to my life…I’m cutting those expenses!
The latte factor really is about recurring expenses in my opinion. It does not matter than you spend $5 on a latte once. It matters however when you turn it into a habit. A $5 a day habit is extremely expensive.
The same can be said of all recurring expenses, as it’s very easy to forget that you don’t need some of your habits. I’m guilty as charged: we have some monthly fee for some insurance I don’t even remember. I need to get it checked, because it costs us a lot and I don’t know what it does.
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Recurring fees often get overlooked. Since I have my bills automatically paid, I might overlook charges like that.
I used the latte factor example at a recent speech I gave on personal finance. I had a husband and wife look at each other and their extra large drink cups from McDonalds as acknowledgement of their own “latte factor”. It really is just a metaphor for anything that keeps you from building wealth. The small wins add up over time.
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Yes, small wins add up especially for those struggling with money.
While I was once a fervent defender frugality and focusing on small expenses, I think at this point I’m probably more in the camp that criticizes that line of thinking.
Like you said, you can focus on both small expensive and big ones. But because we are subject to decision fatigue, focusing on the large and infrequent expenses like housing or mode of transportation frees up our mental space to focus on what really matters, instead of daily, hourly, or by the minute thinking about small financial transactions. The longer I find myself in the personal finance Community, the more I find myself wishing I didn’t think about money so much. I’m sure there’s a healthy way to handle small expenses without actually thinking about them (like setting up systems instead of deciding over and over again), but in general, I think there is usually enough slack in our budget that we don’t have to sweat the small stuff.
I think that’s why personal finance is very personal. It really depends on the person. If you are closing in on financial independence where you’ll be “done by forty” your finances are in a great place. You have the mindset of someone who spends intentionally. There’s no need to weigh every purchase. I’m guilty of sometimes over-thinking small expenses and I know what you mean about not focusing so much energy on them. However, while I’m naturally frugal and should give myself slack, those who are struggling with debt might have to work on changing that mindset to cut some expenses. And as for the large expenses…I get that too but honestly when do housing and transportation expenses come up? Once every few years? Surely we have the mental capacity to focus on smaller expenses. Maybe not a $3 cup of coffee once in a while, but a $30 dinner every night or something like that.
I think you can splurge occasionally, but every day those things add up! I think it’s important to earn more, but also cutting back where you can while indulging every once in a while.
I do believe that small savings can and will stack up into a big one in the future, assuming the savings is invested wisely. Having said that, it’s never bad to occasionally indulge in something you like whether it is latte or something that.
I like to give myself something in return for what I accomplished. This happens rarely but it happens.
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Exactly, there’s nothing wrong with occasional indulges…just don’t make it a habit!
Save money on the big ticket items or the small ticket items, as long as your saving something is the point. McDonalds coffee is only 1 dollar and Starbucks is 3 to 5, so just use judgment. If you are saving 0 dollars and go to Starbucks every weekend, something is off.
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I’m sure some coffee snobs will say that you can’t compare McDonald’s coffee to Starbucks. =) I don’t care either way. Hey, as long as you’re saving a good amount, then going to Starbucks every weekend isn’t a big deal. And yes, like you said…if you’re saving nothing, then you’ve got to fix that.
I agree that it’s a metaphor for all the small purchases that get made. I think this should be extended to monthly services, which are a big spend for millennials. So many services have moved to monthly recurring expenses that it’s more difficult that ever to really get an idea of cost. I recently wrote an article about how I realized I had absolutely no need for my $10/month iPad LTE subscription, which was costing me over $1500 a decade (using Mr. Money Mustache calculations). Since T-Mobile offers a free 200MB plan, I realized that would get me exactly what I needed. At $10 a month, it’s easy to let those types of subscriptions stick around indefinitely.
Yes, I hate those recurring expenses. I think there’s a reason why business love them so much…once they get you, often times, you don’t cancel it. My Netflix account is one of those…I kinda use it, but sometimes I’m not sure if I use it enough for it to be worth the recurring costs.
Why this even needs defending is quite bizarre. Surely it should be blatantly obvious that $5 a day adds up to a large amount over a year or ten years (maybe not to the man on the street but to the PF bloggers who are attacking it, this should be very obvious!)
Good on you for pushing back though and yes it also obviously does not mean you can’t indulge once in a while. Would you advise that we should eat an ice cream every day? No of course not as that would most likely gain you weight and make you unhealthy. Does that mean that people who say don’t eat ice cream everyday because it’s bad for you can’t eat ice cream as a treat once in a while or even once a week? NO! 🙂
Cheers!
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The ones who attack it seem to argue that we waste too much energy on $5 when we should spend energy on bigger costs. I’m not sure why we can’t do both. Not saying that you need to budget all costs…heck, I don’t really budget…just saying that you have to be careful of little expenses adding up when you make it a habit. Oh and another reason for the attack is from a pf blogger who is pushing the his course teaching you to earn a lot more money…so if you earn a lot of money, you don’t have to worry about spending on lattes everyday!
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I can’t give up coffee as I am a coffee lover. But, I have given up smoking for 3 years. I am glad that I did because I feel healthier and the security. Imagine how much money I have saved since I stopped.
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Good for you in giving up smoking…that’s an expensive habit and very unhealthy. I’m sure the future you will thank you for that.
I also came across the Latte Factor and thought it was gold:) What is funny to me is at that time I didn’t drink coffee, but it made sense to me none the less because of the different small items we spend money on.
I’m a big believer in either eliminating the Big 3 (housing, car, food), but I still put into practice not drinking out as much with my coffee or many other things for that matter. I think it all acts as a waterfall of sorts. If you have a 10K mortgage and have decided to cut down on your latte’s to save money you are missing the big picture and won’t really make up much ground. However, if you make a large change and get a 5k mortgage that will do you 100x better than skipping on a latte or almost any drink for that matter.
I also believe in easy wins so if I can cut my coffee down to $50 month and put that other $75 to paying down debt/investing then that’s the move for me.
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Me neither, I don’t really drink coffee…though I do drink a little now that I have a child. I think the Big 3 is of course the most important, but you don’t deal with those expenses that often, except maybe food. I’m sure we have the capacity to optimize other spending too. Great point about missing the big picture though because big savings make a much bigger difference.
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