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\$325 Cups of Coffee, or, Why The Latte Factor Matters

 by Jim Wang Email   Print

The Latte Factor was a term coined by David Bach to represent the idea that the key to reaching financial prosperity is to cut out the little things in life that you’re paying other people for, in this case coffee, and spend that money on yourself and your future. Mathematically, it involves taking the \$5 cup of coffee each day, or whatever other discretionary spending you’d like to substitute in its place, and calculating how much that \$5 would be worth in forty years if you were to have invested it. It’s not a particularly novel idea because everyone can appreciate that saving \$5 each day and then compounding that at 11% each year for forty years will result in a huge number. But it’s value is in that it challenges you to examine the motivations behind your spending and how you could change those for the better.

It’s been shown that if you reduce the price of something from \$9 to \$8, people feel as though they’ve saved more money in that discount than if the original price were \$8 and were dropped it to \$7. The larger numbers seem to trick the consumer’s unconscious into believing more money is saved even though it’s not, percentage-wise. It’s also been shown that when people spend on credit, they’re able to enjoy the pleasure of the purchase without experiencing the pain of actually paying for the purchase, thus continuing to fuel our instant gratification mentality.

Now let us mix and match the two ideas into a super beast that many companies have come to love and take advantage of – large capital purchases on credit. When you make a large capital purchase, such as a house, or a car, or even a plasma television – you spend quite a bit of time researching in order to get the best deal. You do that because you can potentially save more because you’re spending more. You’re aware of the spending because of how much one single item is, thousands, and because of how you’ll be paying, almost immediately. (By “paying” I mean that your lifestyle will be immediately affected by this purchase, you will have to spend less in some places to service the purchase, even if you don’t pay off the entire balance immediately).

Now, what does this have to do with a \$300 cup of coffee? It’s a mere five bucks, five bucks won’t bust your budget, and five bucks will hardly register on the radar for those who drink it every single day. It’s not a plasma television, it’s not a car, and it’s certainly not a house… it’s a drink that will perk you up, make you feel awake in the morning, and gosh darn it, you deserve it. However, that \$5 purchase is a capital purchase when you extrapolate it over forty years.

If you compounded \$5 over 40 years at 11%, that cup of coffee costs will you \$325 minus taxes. Three hundred bucks for your cup of coffee. A \$300 a day coffee habit would probably qualify you for Coffeeaholics Anonymous. Even if you compounded it at 8%, that cup still costs you over a hundred bucks. See, you care about the plasma television purchase price because it’s a thousand dollars now and you don’t care about the cup of coffee because it’s a mere \$5 now; but won’t you plus forty years be wishing you didn’t have that cup of coffee? I would think that you in forty years deserves an extra \$300 a day just for putting up with you for the last forty years, don’t you? (wrap your head around that little Philip K. Dick mess of confusion)

I think so.

16 Responses to “\$325 Cups of Coffee, or, Why The Latte Factor Matters”

1. Minimum Wage says:

What about ther David Bach Factor? I once blew \$595 (you read that right) on an 8-week series of weekly conference calls with David Bach and a bunch of others seeking financial wisdom.

2. dong says:

Minumum Wage, if you really had \$595 to blow on David Bach, you’re not doing better than I thought you were. That said, even though I can’t stand David Bach’s tired formula, my girlfriend who doesn’t have any financial background really found “Smart Women Finish Rich” empowering and eye opening.

3. One problem with your analysis – for me, at least, the \$5 coffee (actually it’s \$2.10 since I don’t do the lattes on most days – and even a latte is really \$3.95) adds more than \$5 to my productivity for the day. If I cut out the coffee, I would reduce my wealth in 40 years by the lower cumulative earnings, also compounded.

Me + 40 years would also be even sicker of me if he had another 40 years of me sans coffee!

4. I’m not so much a fan of the latte factor, as of the Automatic part of his spiel. Changing your habits only to be miserable isn’t much of a gain, but automating all of your finances so you don’t have to continually think about it is GREAT.

5. aw says:

Ditto on the 3rd comment. If you use your coffee break to socialize with your co-workers, discuss topics of the day, and to generally enhance your work and personal relationships, then you gain much more in value than the \$5.

6. jim says:

Well, focus less on the coffee and you can replace it with something that you could conceivably cut out without significant downstream impact.

7. Anonymous says:

I had an extended illness where I was in hospital two months and unable to work for a year after that and had a temporary disability income until I was able to return to work.

8. Meg says:

I never considered backing out the price of the coffee in light of it’s potential gains. Sure makes me look at my cup differently! I think the main idea is to spend your burn money on something that genuinely improves your day to day quality of life. If that’s a cup of \$5 coffe, then fine. But maybe you can cut out the \$15 in mindless purchases you buy at the gas station as you’re filling up, the \$4 muffin you get with that coffee, the \$50 gym membership you use once a month, etc. Almost everyone has a latte factor they really could cut out with very little to no sacrifice whatsoever. It just takes awareness. And the \$325 calculation definitly raises my awareness!

9. Lazy Man says:

The sad part is that the “little over \$100” will only buy you a few cups of coffee in 40 years. Inflation hurts.

10. jim says:

Yeah… \$5 will be \$25 in forty years (4% inflation) … but still.

11. jim says:

Happy Birthday!

12. Mrs. Micah says:

Well, I’m going to buy myself a \$260 cup of coffee today anyway because it’s my birthday. Specifically Seattle’s Best Javakla with Oreo, small (my favorite!) approx \$4. But this makes me appreciate even more that. Mr. Micah often drinks coffee, but he makes it @ home which is much much cheaper. Esp since he doesn’t buy expensive coffee.

I only buy it 2-3 times a month, on date nights.

Anyway, good post. It’s nice to know that the small amounts I save today will be worth something in the future…even hopefully with inflation.

13. Star Money Articles for the Week of September 10

Here are some recent interesting posts from the MoneyBlogNetwork and beyond: No Credit Needed is on day 13 of 33 detailing how to save money and get out of debt. Get Rich Slowly details the shockwaves of a lifestyle change.

14. thomas says:

We all know (or should) that sloppy spending can hurt your financial future. At the same time, a lot of people don’t want to give up their “thing” or whatever it is. People can’t be expected to invest everything they have and not enjoy something in life. Guilty pleasures don’t always have to be guilty.

The way I look at it, retirement is 20-25 years. You work for 40+. If that cup of coffee is going to put a smile on your face, then get it. You don’t have to buy the latte every day, but you don’t have to give it up either.

15. Posco says:

LOL. Adding inflation to the formula changes it quite a bit, huh? So, come again: why does the Latte Factor matter?

16. shirley says:

You can’t give up everything for the sake of saving money, that would be miserly. But you don’t have to overdo it either. Moderation is key.

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