Ever since best-selling author David Bach first popularized the Latte Factor, a simple concept to show how shifting regular amounts of “unnecessary” spending towards spending could add up to big sums over the long run, the idea has been met with both praise and criticism.

Coffee beans for decor? So unnecessary!

The arguments on both sides seem to take one of two extreme positions: 1) that everyone should follow its tenants religiously, regardless of their personal financial situation OR 2) it’s entirely bogus and everyone should ignore it.

But neither extreme is helpful they lump individuals of all financial situations into the same bucket.

Below, a latte will represent any mindless, regular expense that could be reasonably minimized or eliminated entirely.

Do you pay off your credit cards in full each cycle?

According to CNBC, using data from Creditcards.com, Nerdwallet, NextAdvisor, and Wallethub, 43% of Americans are carrying a credit card balance for AT LEAST two years! That is more than 2 in 5 Americans have been carrying a credit card debt for 24 months or longer!

With an average balance $16,883 per household at an average interest rate of 15.5%, it’s no wonder that American households are spending over $100B a year in interest payments alone.

So if you are among this debt carrying segment, you definitely should not be buying that daily latte. Why?

That $4 latte you charged on your credit card that you carry for 24 months at an interest of 15.5% costs you $5.44. And if you carry that balance for 48 months, it now costs you $7.41!

If you’re currently financing even your smallest daily purchases with expensive credit card debt, then definitely no lattes for you

Every latte is digging you into a deeper hole of debt hell. And to start getting yourself out, you have to first stop digging deeper.

Compare the Latte Factor to your actual savings.

Do you currently save over $100K a year towards retirement & savings?

If you’ve answered yes, you don’t need to worry about your daily latte (or two)! Now I’m not suggesting that you have to be saving this amount every year to qualify you to ignore the Latte Factor.

What I am saying is that at some point, for high and very high-income earners who are saving a large portion of their income every year, whether they drink a latte or two every day will only have a MINIMAL impact to their overall savings rate.

So let’s see how a $4 daily latte 5 times a week ($1040 annually) adds up and compares to different annual saving levels.

Play with the calculations yourself here.

(Make a copy of the file to edit and play with the calculations)

On the x-axis is the annual savings after the latte spend–this is how much you’re saving even after making your daily trips. The bar charts are the respective impact to your savings if you instead opted out of the latte trips and redirected all of that spend into your savings.

As you can see, for someone who is saving next to nothing, just $100 a year, that $1040 annual latte spend would increase their savings by 10X! But as the saving levels go up, the impact drops. For someone saving $100K a year already, opting out of the lattes would only improve their annual savings by 1%, hardly worth any mind share to stress over.

So where should that threshold be? 20%? 5%? It’s up to you. But recognize that we’ve only just been looking at ONE regular, unnecessary spend. Imagine looking at all of your expenses and cutting or reducing multiple items?

How much of an impact would your latte expense have as a percentage of your overall savings before you would adjust your spending habits?

Now consider this.

According to NerdWallet, the average American house hold saves less than 5% of their income. And the US Census estimates the median household income to be $57,652 (using 2013-2017 data). For the median US household saving less than 5%, that means they’re putting less than $2900 in total away every year.

For that median household with less than 5% savings rate, a $1040 annual latte spend would make up more than 1/3 of their annual savings!

But notice that I said savings, not income. Because making a high income does not necessarily translate into savings. This is why when we think of recurring small expenses, it’s much more useful to compare it to one’s savings rather than income level.

Making $200K a year but saving almost nothing? The lattes are just a small piece of your much bigger spending issue. Small adjustments can make a huge difference in savings.

Making $150K a year and saving over $100K a year? You’re obviously careful about your spending. Focusing on further growing your income is a better use of your time than to worry about your daily lattes.

The Latte Factor is about spending awareness, not spending.

All the criticism of the Latte Factor over the actual cost of a latte, the average number of lattes a person orders in a year, the average investment return someone can get if the invested the difference, or the lifetime financial impact of cutting back on lattes, whether it be $50K, $150K, or even $1M over 30 years…is entirely missing the point.

They say worrying about the latte is penny wise, but pound foolish.

The Latte Factor is not really about the lattes at all. It’s about being mindful of your spending and recognizing that every dollar you spend is a dollar you don’t get to invest in your future. It’s about recognizing the opportunity cost of your spending.

What made it appealing was its simplicity and apparently easy path to wealth–that cutting back on a small expense everyday could make you millionaire. It won’t.

Most of us will not become financially wealthy, or anywhere close. In a survey of 8000 Americans, over 2/3’s respondents said they had less than $1000 in total savings!

It’s not about penny-pinching and living in extreme frugality. Although there’s nothing wrong with that if that’s what you’re into. But reevaluating your spending habits and becoming mindful where and how you’re spending, even if you are able to redirect just the equivalent of $5 a day towards your retirement savings, will make a noticeable dent over time. Especially if you’re among those with hardly any savings.

When your savings are pennies, cutting back small expenses is pound wise.

The Latte Factor is harmful if you ignore big expense.

The Latte Factor is often criticized for for glorifying penny pinching while encouraging the blissful ignorance of truly big expenditures, like housing and transportation. But that’s not a fair criticism.

That’s like saying the going to the gym encourages weight gain because people often overeat after immediately after their workouts. There’s nothing wrong with going to the gym. There’s something wrong with human psychology. It’s moral licensing–when doing some small bit of “good” gives you the excuse to indulge in the exact opposite.

There’s nothing wrong with the Latte Factor either. It does not encourage you to ignore big expenses. People just tend to use it as an excuse to do so.

The Latte Factor is not about depriving yourself.

For the coffee lovers out there, getting our morning cup of caffeinated bliss is anything nothing short of necessity.

But the Latte Factor forces you to evaluate the real reason for your latte trips. Is it really for the taste? Ask the coffee aficionados you know whether they prefer their own home brewed pour over with freshly roasted and hand ground coffee over a Starbucks latte. If you want the best tasting cup of coffee, you have a better chance of getting it at home.

Or is for convenience? Consider the amount of time it takes to drive to, order, wait for, and pay for each order. Those frequent 15-30 minutes trips can add up hours every year. Could you put that time to better use?

Direct savings alone may even justify having a $1000 espresso machine at home, saving you money and time every single day, while getting a comparable or even better-tasting coffee fix.

So where do you stand? Do you care about the Latte Factor?

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