If you are new to the world of personal finance, you may have the impression that the greatest sin you are committing against your own financial future is buying lattes—or any other small luxury. The term “Latte Factor” was coined by David Bach, and the theory behind it is that small spending habits can be changed into savings habits for growing your wealth.
On the surface, the Latte Factor is absolutely correct. Yes, if you are spending close to $5 five days a week on a coffee treat at your local Starbucks, changing your habits so that you are making your own coffee and pocketing the difference will save you close to $1300 per year. However, the simplicity of this theory is also its downfall: there are very few people who will actually end a year without lattes $1300 richer. Here’s why:
1. The Latte Factor assumes that you are spending money mindlessly. There are certainly individuals who spend money without thinking about it. You only need to look at the proliferation of advertisements for credit counseling to know that this is true. However, if an individual is mindlessly spending money on a $5 luxury each and every day, it’s rare that this is the only place where they are spending without thinking. Rather than focus on the $5 cup of coffee, most mindless spenders need to think more about the larger purchases they make without thinking. Not only do those larger purchases make up a bigger portion of income and budget, but they are also in many ways easier to cut and save. Keeping track of a daily $5 so that you can save up $1300 over the year is much more difficult than simply saying no to a new $1300 television.
2. This advice is useless for a family or individual who has already cut expenses. Anyone who is already working to improve their financial situation by cutting coupons, walking more, canceling cable, etc, can get incredibly frustrated by the number of personal finance gurus who tell them that they just need to cut out their daily latte to save big. Those budgeters have already cut out any luxuries they might have once enjoyed in hopes of saving. If they have already reduced their spending as much as they can, they know ahead of time that they cannot afford to buy a daily $5 luxury, so the advice is useless to them.
3. The Latte Factor makes you feel guilty for spending money on yourself. We all need little luxuries here and there. There is nothing wrong with pampering yourself and budgeting for luxury expenses. The important thing is that your spending should reflect your priorities. If it is important to you to have a pick-me-up in the morning that you do not have to make—and you are willing to pay for it, then that’s no problem. If, on the other hand, you’d prefer to save your money for a lavish vacation so you go without little luxuries in your day-to-day life, that’s perfectly fine, too. There is nothing wrong with spending money on yourself, as long as you are making your money decisions mindfully.
The Bottom Line
The Latte Factor is a very simplistic way of looking at how people spend money. The math is correct when showing that little luxuries add up. But the more nuanced and better advice is to make certain that your spending reflects your priorities.
If that priority is to outsource your coffee making so you can have an extra 30 minutes to sleep every day, then feel free to enjoy your extra snooze time.
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