We often hear about how the "Latte Factor" keeps us in debt: Cut out the daily - or sometimes twice daily, in my case - trip for a chi-chi coffee and you'll be wealthy. But if you find your coffee- or espresso-based drink to be a near-religious experience, as I do, the Latte Factor may not hit home for you. Luckily it turns out that you can adhere to the principle behind the Latte Factor and still have a daily latte, which is good because the only way I'm giving up my lattes is if you pried them from my cold, dead hands.
The Latte Factor was coined by David Bach of The Automatic Millionaire fame. It really refers to any of a number of habitual expenses that are seemingly innocuous but add up over time. If we stick to the latte analogy, a $4 drink once a day adds up to $1,460 a year. If we assume that the price of a latte increases by 3 per cent a year, and we could otherwise put this money into an investment portfolio that grows at 6 per cent a year, then over the next 30 years, the total opportunity-cost of drinking a daily latte is just over $170,000 (about $70,000 in today's dollars).
There is a disconnect between the monetary cost of various products and services and the individual perception of value of those services. Some people don't drink coffee at all, but perhaps they don't hesitate to hire a landscaping company to mow the lawn in the summer and clear the snow in the winter. After accounting for the maintenance of the equipment and cost of the salt, perhaps their annual outlay is also close to $1,500 per year. Then there are people who drink the daily latte and have the professional groundskeeper. Based on this information alone, do we know who is better off?
No.
The Latte Factor is not the only heuristic for wealth creation, but is does fall under a more basic tenet: Spend less than you earn. That saving could come from irregular big-ticket items (such as not buying the latest large-screen TV every three years), or it could come from small, regular purchases (such as lattes or landscaping).
The point is that your overall budget is of paramount importance when it comes to personal finance. If you have a surplus at the end of the month, I don't care if you buy three lattes a day, have a groundskeeper and a housekeeper, you are living within your means.
For many of us, it is life's little pleasures that keep us trucking through our days. There is no need to feel guilty about them if you're otherwise making responsible financial decisions. We're lucky to live in a society where we have so much choice with respect to how we live our lives. If creating wealth is a big priority, you can sacrifice more now, and that's fine. If you feel you're on track, perhaps you don't have to sacrifice that daily indulgence, and that's fine too.
For most of us, the Latte Factor has nothing to do with lattes.
Preet Banerjee