What is the Latte Factor?
If you have ever read a blog, newspaper article, or modern book on personal finance you’ve probably been exposed to the phenomenon known as the “Latte Factor”. If you want a more thorough explanation head over here, but the basics are as follows: If you were to give up your daily coffee ($4) and instead invested the money you saved each year ($1460) then this savings would yield an impressive figure when you retire in another 40 years (over $400,000 by my estimates). This is a sweet amount of money to be sure and I would certainly not turn it away if it were on my doorstep, but let’s dig a little deeper into what the message is here and what it means for your finances.
At its heart the latte factor is really just a metaphor for how giving up the little bits of extra spending we do each day can really add up over time. We could use beer, cigarettes, lottery tickets, sodas, or anything else that we spend relatively small amounts of money on, frequently. In fact, there are lots of people that make the same case for all of the above items in one place or another. Typically they are toting the “true cost of your vices” or something like that, but even with a moral argument tied in the basic economics is the same.
How many times have you gone into a store, especially a gas station or convenience store, for just one item and leave with 2 or 3? How many times have you grabbed a candy bar or magazine while you were in the checkout line at the grocery store? These types of events happen all the time. There is nothing really wrong with it, but you cannot deny that we end up with all kinds of stupid expenses that we regret later. You could also argue that some of this spending, especially the morning latte, is really just a simple pleasure that helps us start our day off on a positive note and something that we can actually get real satisfaction from.
The latte factor might suggest that you should give up these simple pleasures in order to reap the rewards in the future.
Does anyone see anything wrong with this?
Extreme Frugality is a Little Depressing
Look, I’m all for cutting back expenses, especially on unnecessary items that we really get no value from.
I’m all for cutting coupons, shopping sales, or whatever means you can use to spend in the most efficient way possible.
I’m all for budgeting your money and saying no to things that simply won’t fit in with how you’ve allocated your dollars.
I’m definitely all for exercising moderation when it comes to spending and avoiding “keeping up with the Jones’s” types of purchases (brand new cars, etc)
And, if you are in serious debt and your finances are on life support please DO consider skipping the latte as well as a host of other extras.
But at some point you have to have a life!
You could cut back on everything, live with 10 people in a tiny apartment, and eat water and crackers for 10 years and probably have enough saved up for a decent early retirement! But, who wants to do that? Please do not think that I am recommending a life of excess, but there should be some type of balance in your life and I firmly believe that you should allow yourself some of life’s little pleasures occasionally so that you can actually enjoy your life. If you were buying tons of sodas, cigarettes, and beer from the gas station along with two overpriced Starbucks lattes every day then you probably have bigger issues than money to worry about (namely your health). There is nothing wrong with living a balanced life with a few luxuries budgeted in.
I Would Rather Make More Money
Rather than worrying all day about how many lattes I can or can’t have I would rather be worrying about how I’m going to increase my salary, develop a side hustle, or otherwise increase my income to the point that life’s little luxuries simply don’t make as much of a difference. I’m aware that the more money you have the more you want and I’m sure that if I was rich my tastes would be much different, but honestly my wants in life are not huge. My goal is to secure an income in which I can do the following:
- Pay all of my normal monthly expenses in full with no issues
- Keep my kids living in the best school district wherever I’m located and ideally buy a decent house wherever we decide to settle down
- Max my 401k, Roth IRA, and 529 contributions each year with extra to invest after-tax
- Be able to take yearly vacations with the family (Disneyland, cruise, etc)
- Have two well-maintained modern vehicles
- Have some disposable income for dinner out, scotch, trips to the movies, and other minor luxuries each month.
I realize that I can never truly know how I would react if I was able to grow my income to a super high level, but I know that my plan would include taking care of all my savings obligations FIRST. Spending would hopefully be a little further down the list once everything else was handled.
One thing about all of my goals above is that it would be really hard to achieve all of those things simply by cutting extra spending out of my budget. Yes, it would certainly help the cause, but $2,000 saved in lattes every year is barely over 10% of the yearly 401k max contribution. I would much rather earn an extra $20,000, max my 401K, and still have $2000 left for a latte every morning.
To tie in with the earlier example:
$2,000 latte money invested over 40 years in 401k= ~$400,000
$20,000 in extra income -> maxing out 401k at $18,000 per year over 40 years = ~$4,600,000 + 1 latte every day
Earning more money always makes things easier.
Maybe That Latte is Necessary
Let’s just say that you worked a 9-to-5 job and made a decent salary, but you were still falling short on your financial goals. Instead of cutting back on everything and seeing a modest, but miserable gain why not channel that energy into a side hustle? I would much rather see a sizable gain on my effort in the form of extra income. Plus, you would gain all of the other benefits that developing a side hustle brings: confidence, pride, work ethic, respect among your network, etc
I’ve done lots of things over the years on the side in order to make a little extra money and they have all been just what I needed at the time. Hopefully I can find something else that I can be passionate about for the long term and really make a difference with. One of my life goals is to find something that makes a lasting impact on others and benefits the world in a positive way. I’m still working towards that goal.
One thing I do know about working hard for a salary, developing a side income, and spending time with a family you care about is that it sure can be exhausting. It can be so exhausting that sometimes when I wake up early in the morning to get some extra work in I really get the feeling that I COULD REALLY USE A LATTE RIGHT ABOUT NOW!
Is there anything that you refuse to give up in your daily life? Would you rather make more money so that you are able to have the simple pleasures with less worry about how to pay for them? Let me know in the comments!