Does the latte factor make sense for personal finance?

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I don’t think you can even write about personal finance without addressing the so-called “latte factor.” A long time ago (the 90s) a personal finance writer named David Bach coined the term to express the idea that you could build up wealth by redirecting your small time expenditures into savings.

I’m of two minds on this. On the first mind, I think, 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 $2 coffee every day and switch to tap water in a water bottle you already own), 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, $55,000 over 40 years. But you had to make the 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.

This doesn’t seem like a bargain to me. It’s like saying – “here’s the secret to being healthy in old age – “Just say no every time you see something delicious you want to eat. Continue for 40 years.”  I like to think I have a fair amount of willpower, but this coffee task seems daunting. And that’s to me – someone who can only physically handle one coffee per week.

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.

What I’ve realized after being a frugal saver ever since my first job, is that these small expenses don’t matter to me. A daily $4 coffee, a $10 Uber, even a $500 airplane change ticket – none of these will affect my day-to-day. They don’t affect my savings. They don’t change my plans for retirement. They don’t register on my net worth. When I was starting out, they certainly would have. But I’ve achieved a level of financial security where I don’t have to worry about these amounts.

However, this might be different for you. 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 and there are no downsides, 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 – and the amount of money you spend on coffee is a factor in your budget – then cut out the coffee.

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, but the “latte spectrum.”  Don’t spend on luxuries, even little ones, until you can afford them, but when you can afford them, don’t sweat the small stuff. 

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?

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