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Financial author David Bach is famous for teaching a concept called “The Latte Factor,” which is the idea that recurring small purchases like coffee, cigarettes and ordering pizza add up to a ridiculous amount of money over the course of a lifetime. For example, if you were to buy a $3.50 latte every day over a working lifetime, that would add up to more than $50,000 (40 years * 365 days per year * $3.50 per day). If instead, you were to “skip the latte” and invest that money over the course of four decades in the stock market, you would have close to $1 million by retirement. While the math behind The Latte Factor is correct, putting it into practice is harder than it sounds and it’s also it’s based on some pretty flawed precepts about wealth building and retirement planning.
I was recently curious to see how much money I’ve spent at coffee shops in the last year when this principle came up in a conversation. According to my credit card statements, I have spent more than $3,600 at Queen City Bakery in 2019. This isn’t much of a surprise to me since I eat breakfast and have coffee there pretty much every day of the workweek, except Tuesday’s when they are closed. I also have most of my coffee meetings at Queen City and we have most of our company staff meetings there too.
If I were to skip my morning trip to Queen City Bakery between now and retirement and invest that money, it would add up to more than $510,000 by retirement. Does this mean that my morning latte habit is sabotaging my retirement and my ability to save for the future? Should I break up with my favorite coffee shop so that I can put away another $300 a month for my retirement years? You probably know what my answer is going to be, but I think it’s worth explaining why I think “skip the latte” isn’t financial advice that should be taken seriously.
There are three real flaws behind the concept of The Latte Factor.
- The Latte Factor assumes that wealth is finite, scarce and needs to be preserved at the expense of your daily enjoyment.
If you had a fixed salary that didn’t change outside cost of living adjustments each year, you would probably want to be concerned about having a strict budget to make sure that you are putting enough money away for retirement. In that scenario, you need to maximize the dollars that you do have to make sure you don’t run out of money when you can’t or don’t want to work anymore. However, I don’t believe wealth is a scarce resource. I believe wealth is abundant. It’s just that most people aren’t willing to learn the skills and put in the work to acquire more of it. There are almost always ways that you can make more money, especially in the era of 2% unemployment rates, side hustles and six and seven-figure online businesses. More people than ever are finding ways to make an income outside of their day job, through working for gig-economy companies, starting part-time businesses, selling stuff online and investing in real estate. It’s becoming so common that we may be entering an era where moonlighting becomes the default and not just something Dave Ramsey fanatics do to get out of debt.
Don’t assume that the income you have now is the only income you are ever going to have. Get out of a fixed mindset about wealth and start to think about ways that you can expand your income by getting a better job, doing a side hustle on nights and weekends or starting a new business. Instead of trying to preserve the most of the money that you have now by skipping out on your daily coffee or going out to eat, think about how you can make so much money that your daily latte just doesn’t matter in your total financial picture.
- The Latte Factor assumes that you won’t just spend your money somewhere else.
The math behind The Latte Factor is straightforward but putting it into practice isn’t. Our brains are hard-wired to favor short term pleasure over long term results. That’s why most weight loss plans simply don’t work. We might be super motivated to start working out and lose weight, but then you get hungry and your diet goes out the window. Skipping your morning latte, or whatever optional recurring financial expense you have, requires the changing of a habit and not just making a one-time decision. Unless you can make the same decision every day for the rest of your working life, you will probably never actually put the concept into practice.
The Latte Factor also assumes that you are actually going to take the money that you aren’t spending on coffee and just spend it somewhere else. Many people just don’t have the financial discipline to live on less than they make, even if they were to successfully eliminate their daily coffee habit. You would also have to make the conscious decision to invest your $3.50 daily latte every month into the stock market or set up an automatic investment plan to do that for you. If you are disciplined enough to change an ingrained daily habit, live on less than you make and set up an automatic investment plan, you probably are already saving money for the future anyway and The Latte Factor concept isn’t super helpful to you anyway.
- The Latte Factor assumes that your daily latte doesn’t make you any money.
I probably have between 150 and 200 coffee meetings each year with people that want advice, want to discuss a business deal or simply want to catch up. Those coffee meetings foster relationship building which is incredibly important in business and in one’s standing in the community.
Early last year, I had a lunch meeting, that turned into a coffee meeting that turned into three more coffee meetings that turned into buying an apartment complex with another investor. A couple of years ago, I had a coffee meeting that lead to a business deal that opened up a bunch of new financial data sources to use on MarketBeat. Another coffee meeting led to the opportunity to make a business loan that was helpful for the business and profitable to me as an investor as well.
While I’ve probably spent more than $10,000 at coffee shops in the last five years, I’ve earned far more from the friendships and business relationships that I’ve built over sharing a cup of coffee. That goes for both dollars and cents and the non-financial benefits of being part of a community, building friendships and the simple enjoyment of a morning cup of coffee among friends.
The Latte Factor does a good job of demonstrating the value of saving over time and compound interest, it shouldn’t be taken as hard financial advice like Dave Ramsey’s baby steps might be. At best, it’s a cheeky financial concept that encourages you to think about saving money. At worst, it perpetuates the incorrect belief that wealth is finite and needs to be preserved at the expense of your daily happiness.
