One of the most recognized concepts in personal finance is the Latte Factor®. David Bach trademarked this concept as part of his personal finance and financial planning ideas. The basic concept is this: If you stopped spending money on a high-priced latte each day, you could save up enough money to be a millionaire. Of course, the Latte Factor® isn’t just about coffee. The idea is supposed to be translatable to any small expense that you have regularly, whether you buy lunch each day in your company’s commissary, or spend a few bucks on some other treat regularly.
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Bach’s Latte Factor® encourages you to look at those little purchases you make without thinking. You don’t think much about spending $3 here and $5 there. However, it could add up — and add up big — over time. If you spend $5 every weekday, that’s $25 a week, or $100 a month. Over a year, that adds up to $1,200.
Bach also has a calculator that can help you see what you would have had if you invested the money. You can choose a variety of returns. For example, investing $3 daily for 40 years at 6% would amount to $179,632.21, rather than spending that $3 each day and paying $43,800 over the same period (365x3x40).
While it’s true that there are many money leaks that can siphon away your money, and plugging them might help you increase your nest egg, it doesn’t mean that the Latte Factor® is going to provide you with untold riches.
While the Latte Factor® may work well for some people, there are those who prefer to worry more about the big stuff, and not worry about cutting the small stuff from their lives. Why worry about cutting out a coffee that costs you $100 a month when you could make a few phone calls and save even more. I recently switched to a high deductible health plan and opened a HSA. I save about $300 a month on my premiums. We save on our car insurance because we are good drivers, and have good credit.
When you focus on the big stuff, the small stuff doesn’t seem as expensive — nor will it hold you back as much. Indeed, sometimes it’s the small things that bring so much pleasure to your life. Sure, my husband and I could stop getting more expensive pastries at the local bakery once a week. We could get them mass-produced at Wal-Mart for 1/4 the price and only get them twice a month. We’d save $24.50 a month if we followed that plan. However, the pastries are better at the bakery, and we really enjoy sitting down together and savoring them. A simple pleasure that, to me, is worth $24.50 a month.
Besides, the $300 I’m saving each month due to my HDHP more than offsets the cost of the pastries. Bach’s calculator says that $20 monthly for 40 years at 6% is a little more than $39,000. I’m not sure I want to give up a simple pleasure for the next 40 years just for an extra $39,000.
Of course, it all comes down to your individual priorities. What are you willing to give up? Would you be willing to work a little more if it meant that you could have money for the future, or pay for little pleasures? In some cases, the Latte Factor® really isn’t going to cut it. If you save $3 a day for 40 years, and end up with more than $179,500 extra, what have you given up? And will it even make that much of a difference if you haven’t done much more than save that $3 a day? It’s certainly not enough to retire on.
What do you think of the Latte Factor®? Is it enough to help you get rich?