Why the Latte Factor is Irrelevant to Your Finances

white coffee mug on brown surface

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I don’t think you can even write about personal finance without addressing the so-called “latte factor.” For some background, in the 90’s, a personal finance writer named David Bach coined the term “the latte factor” to express the idea that you could build up wealth by redirecting your small expenditures into savings. Quit your lattes and you can retire! It sounds nice and fits well on a bumper sticker.

You Can’t Fund Your Retirement by Cutting Lattes

I’m of two minds on this. On the first mind, even though I don’t drink much coffee, the cost/benefit ratio of quitting a daily coffee habit seems low. Assuming you incur no additional expenses (say, you cut out a $3 coffee every day and make coffee for $1 at home), derive no additional benefit from your coffee than the actual coffee, invest that money and wait for it to grow, and there isn’t a market downturn, you can have, $57,000 after 40 years. That’s enough for one year of retirement! BUT you had to make the right choice 14,600 times (40*365, assuming that you are only tempted to get coffee once per day). You get a year of retirement savings after making 14,600 perfectly correct decisions.

I don’t think of this as the “latte factor” because overall, I think attacking a part of your budget that will yield such small results seems pointless.

When Cutting Out Lattes Backfires

This doesn’t seem like a bargain to me. It’s like saying – “here’s the secret to being healthy in old age – just run 5 miles every day for 40 years straight.”  I like to think I have a fair amount of willpower, but doing something a little difficult every day seems to be a recipe for disaster. I would rather make fewer decisions.

As we know, decision fatigue is real. The more decisions you make, the lower your willpower to make good decisions. So even if you make the “good” decision to forgo coffee, maybe you get tired later when someone asks you to get a croissant. Or to go to happy hour. Or to skip a networking meetup. You can’t just expect this one decision not to have any effects. Also, you’re extra tired of making decisions because you don’t have enough coffee…

The far easier thing to do is to make fewer decisions, and make them the automatic ones. Live in a cheaper place. Drive a cheaper car. Go out to eat fewer times. These involve decisions but you’re saving far more money per decision. For the amount of mental energy saying no to coffee can take, it makes sense to focus on that only after you’ve gotten your other ducks in a row.

Still, You Can’t Splurge All the Time

On the other hand, no one deserves luxury. Let’s face it – the latte-a-day habit is something fairly new. The Starbucks-on-every-corner only happened in the 1990s.  I remember, in the 90s, the news stories about the outrageous prices people were paying for coffee. Now, the prices and the habits have become commonplace. It would never have been a problem to cut lattes even in the high-spending 1980s because it wasn’t even an option.

With some of the prices of coffee reaching $5, that’s too much for an all-the-time expense. It’s quite expensive. It’s not enough to fund your retirement but the expense surely adds up. It doesn’t make sense for people working low-income jobs to spend this much money on flavored water.

If this sum of money is significant to you, then you shouldn’t fritter it away on coffee. Even if we assume that all the studies about the health benefits of coffee are 100% true , no one needs coffee, and certainly no one needs it in a to-go cup everyday. So if you’re already scrimping and saving on the big things – housing, education, food, transportation, etc., and you are still struggling with money, then cut the coffee.  If the amount of money you spend on coffee is a factor in your budget – then cut out the coffee.

Is the Latte Factor Irrelevant to Your Finances?

On the other hand, if you have all your money goals in order and you enjoy having the occasional fancy coffee, go ahead!  I like having a coffee a week. But I’ve scrimped and saved for 10 years. I make a high income. I feel like I’ve deserved one coffee a week with a coworker as a little break from work. And it’s not going to detract from my larger goals. There’s more to life than scrimping and saving. Money is meant to be used.

I focus on the “latte spectrum” which I define as the mantra of:  Don’t spend on luxuries, even little ones, until you can afford them. When you can afford the little luxuries, don’t sweat it too much.  

I think when you can enjoy your little luxuries without worrying about the cost, they’ll become even more luxurious, and you’ll appreciate them more because you will remember a time when you couldn’t have them.

What do you think of the latte factor? Is it worth it to you?