Written by Jeremy Biberdorf
Have you heard of “the latte factor?” If you’re trying to save money, pay off debt, and take control of your finances, you should familiarize yourself with it.
The latte factor came to be from David Bach, author of Finish Rich. The method behind it is fairly simple. Take the small, trivial items we like to buy on a weekly or daily basis, and see how much you’re spending. For many personal finance blogs, this is a common method to help save money.
So, how can the latte factor help you save money and build your wealth?
Understanding the Latte Factor
Before we dive too deep into the method, let’s look a bit closer as to what the latte factor really means. Think about this past week and make a note of all the small things you bought that you could live without.
How many times did you go through a coffee line up? What about a habit you have, cigarettes as an example, and how much did you spend this week on a pack? Do you have any subscriptions to services that you barely use? Was it necessary to drive as much as you did?
The purpose behind the latte factor is to show you how many times we spend money on trivial items, and how quickly it adds up.
Breaking Down the Numbers
You can typically buy a medium cup of coffee for no more than $3. When you first think about it, $3 is nothing, really. It’s not that much money.
Let’s say Monday to Friday you buy your $3 cup of coffee. Each week you’re spending $15, which equals to roughly $60 a month just on your morning coffee. You do that for a full year, that’s about $720 that you gave away to have that coffee.
When you put it into that perspective, the $3 cup of coffee isn’t that cheap. Welcome to the latte factor.
Now, say you took that $60 a month and put it into an investment account (take Ally Invest as an example). If you did that, instead of that $720 getting tossed away, it would make you money. With a 4% return rate, you could earn $15.51 in interest. That’s one weeks’ worth of coffee.
Do you see, then, how even the smallest purchase adds up over time? If you took that money and put it into a growth investing account, a betterment portfolio, or any other investment you want, you’re not only saving money; you’re earning off your investment.
What Can the Latte Factor Do For Me?
The latte factor should change your mindset on your spending habits. It should make you think twice about buying so much coffee every month, instead of making it at home for a fraction of the price.
There are two principles behind the latte factor that will influence your finances. The first is that it saves you money. It stops you from making those small everyday purchases that you really don’t need. It forces you to evaluate your financial situation against your spending habits, and it shows you how and where you need to make some changes.
The second point is that the latte factor shows you how much money you could make on top of saving. Putting that little purchase into an investment account instead, you’re earning a passive income that could be very helpful down the road.
Take Control of Your Finances
Use the latte factor as a way to take control of your finances and reach financial freedom.
What does financial freedom even mean though?
Striving for financial freedom means you know longer live paycheque to paycheque, worrying about if you can cover rent this month among many other bills. Instead, you paid off all of your debt (or close to it), have a savings and emergency account set up, and you’re able to live a comfortable life.
Don’t expect this to happen overnight though. The latte factor will take some time to adjust. Instead of going for coffee five days a week, cut back to three times. Once you get used to the change, cut back even more.
Another way to help is by having a goal in mind. Have a reason as to why you’re saving. It could be buying your first home, saving for a trip, or increasing your emergency fund. No matter the reason, having that goal can give you that extra push needed to take control of your finances.