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.