If you haven’t already heard of the “Latte Factor”, it was popularized by David Bach in his now bestselling The Automatic Millionaire.
The basic idea is that you find an insignificant, daily expense, in this case your morning latte, and either cut it out completely or cut way back. Of course it could be the morning paper, the everyday lunch date, the salon, etc.
U.S. News recently put this statement to task, stating that “it might be based on faulty math.” Well, a penny saved is a penny earned, right? Not so fast.
His [Bach's] so-called “Latte Factor” includes all kinds of expenses, such as manicures, massages, restaurant meals, and premium cable. In the example he uses, the total cost of these extra expenses comes to $1,100 a month. Over 30 years, he says, that money is worth almost $2.7 million. That’s true – if you can somehow find an annual interest rate of 10 percent.
Those types of returns in today’s markets are optimistic at best. The article continues arguing that you should go ahead and buy the latte and provides 5 good reasons why.
1) The Numbers. Here’s a more realistic look at the cost of buying one latte per day: If you spend $3 a day on coffee and if you could otherwise earn a 3 percent return on your money, then you could have just over $50,000 after 30 years.
Not a small amount for sure but not anywhere near millionaire status either.
3) The Tradeoffs. We make decisions about what to spend money on, and what not to spend money on, everyday. Some of us prefer to put cash into our pets but skip restaurants; others prioritize shoes over electronic gadgets or vice versa. For some people, buying fancy coffee is a priority because it brings them pleasure.
This is the argument Ramit Sethi makes in his book I Will Teach You To Be Rich. Find the one or two things that bring you real joy. Cut out everything else.
So, if you want to spend $5,000 on clothes every year, cut out $5,000 somewhere else in your budget. You’re happy and your bank account is happy. In other words, don’t spend money on junk.
Are you a “latte factor” devotee? Let me know what you think. I’d love to get feedback.
Read the other 3 reasons to splurge on your latte at U.S. News & World Report by Yahoo News