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I know a lot of personal finance bloggers have mentioned the Latte Factor at some point or another, but I really like it- it really 'hits home' for me so I wanted to write about it to. What is the Latte Factor, you ask? The Latte Factor is a phrase coined by David Bach, the author of The Automatic Millionaire. He says that most people have these small seemingly insignificant purchases daily (like the latte that you get at Starbucks before you head to work) that really add up.

I know a lot of personal finance bloggers have mentioned the Latte Factor at some point or another, but I really like it- it really ‘hits home’ for me so I wanted to write about it too.  What is the Latte Factor, you ask?  The Latte Factor is a phrase coined by David Bach, the author of The Automatic Millionaire.  He says that most people have these small seemingly insignificant purchases daily (like the latte that you get at Starbucks before you head to work) that really add up.

If you spend $3.50 on a latte every day when you go to work, that adds up to be  about $17.50 a week (for a five day work week).  Multiply that by 52 weeks and you get $910 a year.  Yes, that’s almost a grand per year on coffee!

Let’s say for example you decided to sock away the $3.50 per work day into savings instead every year for 25 years.  If you compound interest that amount at a reasonable rate of 6% per year for 25 years, you’d end up with $56,827.91.  So that grand that you end up saving per year becomes 55 grand in 25 years.  Pretty crazy, huh?

If you somehow manage to cut those daily expenses out, you’re saving money big time.  I’m not saying deprive yourself of your life and its perks, like if you absolutely HAVE TO HAVE that latte, maybe you can buy one of those machines to make your own before work.  Compromise, right?

What’s MY Latte Factor?

I don’t drink coffee (I know! Blasphemous, huh??) but I did often go out for lunch at work before.  I would spend an average of $8 a day on lunch.  In a year, I spent about $2000 on lunch.  That’s a lot of money that I would rather spend somewhere else (like traveling, for example! or save it for my downpayment).

Since I read that book, I’ve been more vigilant about saving my money and not spending it on day to day things that I could do without.  So I pack my lunch regularly now and only occasionally do I go out for lunch at work.  I guess it also helps if your colleagues don’t go out for lunch at work too!  Sometimes I cave and have a craving for stuff and end up buying a pizza or something, but that’s pretty much it.

What about you?  What’s your Latte Factor?  What’s one thing that you can do without on a day-to-day basis that will save you money over the long run?

Article comments

Justine Headley says:

@Coffee me | The Outlier Model! That is exactly the point. You either reconstruct your habits or get into DIY mode. I have found that making coffee yourself is far easier than going to one of the outlets. You will not only be saving money but time too. But too much coffee will ultimately give you acidity which is bad for your digestion. My analysis of the situation was that you need coffee to break the monotony rather than anything else. So try leaving your console and get some exercise for a few minutes before resuming your work. Give it a shot. I did and it worked.

Fredrickson says:

The Latte Factor is even more important now as everything seems to cost more because of the cost itself and higher taxes. It seems people are going to really have to re evaluate this kind of spending.

Ella says:

I so agree with the latte factor concept. And like Jesse above said it is seeing my income growing and my savings not growing that made me realise all this spending here and there does have big consequences in the long run…

young says:

@Ella- For sure. It’s all the “little things” that we often don’t think about that ads up.

Danny says:

Too much admiration for Starbucks coffee! LOL!

Jesse Bullard says:

This is one of the most insightful articles I have read lately about saving money. Recently, there’s an upsurge in the numbers of social media articles but you hardly come across good personal finance articles. Seems like everybody everywhere wants us to spend the money. Latte Factor has been haunting me for past few years, and I’m young and I have looked at it and I have ignored it. But can’t do that for too long. As you grow old you realise that you earned much more than you seemed to have got. Where the hell did it go? A little difference everyday can go a long way in improving your finacial heath in the future. Thanks for the reminder and te inspiration!

Jason says:

I think that eating out every day has a big impact on my spending. I mean it’s almost 10 dollars to get a decent lunch and I know that if I would just take the time to pack a lunch I could save a bunch of money every month.

young says:

@Jason- totally… $10 really adds up! Thats’ $50 a week and $200 a month. And $2400 a year! That’s a trip to Italy if you ask me 😉

mcham law says:

eating lunch out does me in. If I’m not careful I’ll eat out 3-4 times a week for $7-$10 per.

Just like you I use to spend a lot of money on lunch and there’s the occasional dinner out with friends every other night which could have gone to my savings.

Good post.

The way I calculated it once, I concluded that all of my purchases cost my future self 30 years from now ten times what they cost me today, inflation included. So a simple trick for me is to look at whatever I want to buy, imagine an extra zero at the end of the price, realize that my future self is paying that much for this item, and then see if I still think it’s worth it.
.-= Matt @ Dividend Monk

young says:

@Matt Ahh that’s a good idea! Add a zero- that will definitely hinder any excessive purchases! Maybe I should think of my future home-purchase like that =) That strategy can help weed out anything that is not necessary. I’ll try that next time I’m tempted to buy anything =)

Bitta@151DaysOff says:

Uhm no, I

young says:

@Bitta That’s a good way to put it! Money black hole…! Hey at least you guys can BYOB in Australia =) (LOVE LOVE LOVE that idea!) The cost of liquor here in restaurants is pretty insane. $9 for a glass of wine is the norm!

The Rat says:

Yes, SCU.UN is an open-ended trust.

Even though I do like Starbucks coffee, the stock on the other hand doesn’t offer a dividend payment to investors so it isn’t even part of my investment ‘vocabulary’ (for lack of a better word) 🙂
.-= The Rat

The Rat says:

Nice to see another coffee post :0)

I just did a thread on how McDonald’s is giving away free coffee for a 2 week period!
Not bad if you’re looking to save some ca$h!

Personally, I tend to perk my own coffee while at home. My brother-in-law gave my wife and I a Keurig coffee maker for Christmas and it rocks!

When I’m not at home, I tend to buy Second Cup (SCU.UN) coffee b/c I bought shares in it a few years ago and they offer a lucrative yield of over 10% on the investment. So, when I buy their coffee, I’m investing in myself!

Nice thread
.-= The Rat

young says:

@The Rat I saw that in the paper today, that McDonalds is giving away free coffee ALL DAY from March 1-14. Thats pretty awesome- that will definitely help the latte factor =) lol. Last time Mickey D’s had that promotion, it was only during breakfast hours.

Hehe, good idea about buying Second Cup. Is it an income trust? I guess if you are a Starbucks addict then you can buy some shares in it too, to lessen the sting factor. =)

MoneyHoneySF says:

A grand from one single person a year contribution to Starbucks Latte. If you multiply that by thousands of people, that is why Starbucks is so profitable.

young says:

@Investing Newbie Mmm Au Bon Pain- I think I saw it one time but didn’t try it. We don’t have anything like that here in Canada. $3.50 isn’t too bad for breakfast at all! It’s better than $3.50 for a cup of coffee =) But I shouldn’t be helping you justify your latte factor. =)

@Little House Yes! =) One really has to see what value does something that you have give to you. If it makes you downright depressed if you don’t have it, then there’s no point in omitting that. I think I’m the same with traveling. I know it’s expensive and excessive, but I need it. One good thing about being an addict is that if your friends know that you LOVE Starbucks, then you can get Starbucks gift cards for birthdays and Christmas! =)

@BibleDebt it’s all about the compromise =)

@MoneyHoneySF I know! That’s why TWO Starbucks can exist kitty corner from one another on our big shopping street, Robson. C’mon, who really needs two identical coffee shops across from one another?

BibleDebt says:

An alternative that saves you a grand and gives you the satisfaction of still enjoying what you like. Sounds like an easy compromise from where I sit.

Little House says:

Anytime I see Starbucks mentioned I have to speak up! I’m an addict. Okay, I said it. However, it is my one fault. I save money on every other aspect of my budget, but I continue to splurge on my coffee. Yes, I could be saving my $2.50 a day and it would equate to a savings of over $900. But then I’d be going beyond frugal and into miserly!
.-= Little House

My Latte factor is the breakfast from Au Bon Pain. I actually make a breakfast meal that consists of a buttered bagel and a yogurt. It runs me about $3.50. I’ll try to have it no more than once a week, but sometimes, I have this eerie cravings for it and I’ll go and buy it sometimes 4 times a week. I’m trying to be better about it, but thinking about how I can’t have it actually makes me want it more!
.-= Investing Newbie