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When David Bach first introduced the Latte Factor in his book The Automatic Millionaire, people everywhere (including me) applauded and started embracing the idea of cutting small expenditures from the budget in exchange for becoming a millionaire. I mean, who wouldn’t want to become a millionaire by just cutting out a morning coffee, c’mon. But, after putting this into practice for the past couple of years, I’ve been inclined to reject this so-called path to wealth and started buying lattes again. Let’s take a look at my caffeinated journey from deprivation to indulgence.
What Is The Latte Factor?
Just in case you missed it, the Latte Factor is the concept that little expenditures that occur on a frequent (read: mostly daily) basis have the potential to keep you from building significant wealth over the course of years.
Bach used a latte as an example because, let’s face it, a lot of people can relate to grabbing a cup of coffee or fancy latte for a few bucks each morning without even considering the cost. #guilty
I can remember picking up a copy of The Automatic Millionaire when it was first published back in 2005. At the time, I was young and fresh out of college and looking for guidance to start my life off on the right financial foot.
I thought the concept of setting up financial savings and investments to be automatic was great advice and did so as soon as I had a decent job that allowed for some wiggle room in my budget.
Since I didn’t drink lattes, I didn’t need to cut them out. I failed to realize, though, that I was spending an inordinate amount of money in other categories like eating out, clothes, electronics, etc. These things were my Latte Factor but I didn’t put the two pieces together.
So even though I was saving automatically, I wasn’t cutting out on the other fun stuff to save even more. And I will gladly use my youth and financial inexperience as an excuse for this past behavior :).
Embracing The Latte Factor
As I got older, I got better. Despite some really bad money moves due to a failed long-term relationship (you can listen to the details in this podcast), I stayed abreast of things in the personal finance space.
Around this same time, I started to drink lattes. #growingup
After pulling my life together and rebooting my emotional and financial life, I started to embrace frugality and I realized that I was, in fact, spending money on coffee most days – indeed, I had an actual Latte Factor.
So what did I do? I swore off spending money on anything that wasn’t necessary to increase my bottom line. Lattes were one of the first luxuries on the chopping block, along with eating out, cable, and a huge mobile data plan. My sister even bought me my very first coffeemaker to help me with the frugal transition.
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And Then, I Started Buying Lattes Again
After a few years of living a frugal lifestyle, I have decided I love it and want to continue it. However, I have also decided that living an extremely frugal lifestyle is not for me. Frugality has its place in our overall financial plan and we’re fortunate enough to be able to choose frugality instead of being forced into it.
With that said, I have started buying frequent lattes again without guilt. Yes, according to the Latte Factor calculator, I could easily have an extra $50k in my nest egg in 30 years if I forego my lattes and invest the money instead. But I have also learned that there is no prize for having the biggest nest egg when you die. And in the grand scheme of things, life with lattes is better.
By minimizing our major expenses (think: house, car, vacations, etc.), we have been able to maximize our savings. And that has afforded us financial flexibility.
Since we don’t spend a lot on the BIG stuff, compared to others in our income range, we have reached a level of wealth that easily covers our monthly living expenses. In addition, we’re also on track to meet our future financial goals. In my opinion, that’s justification to enjoy as many lattes as we’d like.
Balance Is Best
The bottom line, balance is best. I’m not dropping money every single day on lattes or throwing caution to the wind and spending money like there’s no tomorrow.
In fact, I still carefully consider how much money I spend on everything – even on lattes – and move forward only if the purchase provides enough enjoyment to justify the expense. Yes, I am still dazzled by $20 and you should be too.
My financial future is still paramount and living a frugal lifestyle is still my modus operandi. But tossing in a fancy latte here and there is something I do actually enjoy and something I will continue to enjoy and spend money on.
So if you’re anything like me, keep calm and coffee on.
What do you think about the latte factor? Is it a means to a wealthy financial end? Or just unnecessary deprivation?
