The Curious Case of ‘The Latte Factor’ — What Your Fancy Cuppa Isn’t Telling You
Let’s be honest — almost 90% of all office-goers require a warm hug in the form of a steaming cuppa every morning. It’s comforting, a necessary wake-me-up and from where I stand, the average corporate human has more caffeine running through his or her system than blood these days and this is not even an exaggeration. But when did the morning coffee become a fashion statement? When did the cup of joy turned into an indispensable statement that makes or breaks your image at a workplace? Or maybe, the even better question would be : When did your latte start having a grip on your status and your espresso commanded the norms of your everyday life?
At this point, the saddest thing in an office is the little coffee machine stowed in the corner of a pantry. Of course, it’s still in use, but it is no longer the star of the show but a mere background dancer fading more and more in to the oblivion. It is now a filler, not the preferred and most definitely not celebrated. A bland white mug with a big blob of a life-saving brown potion? That cannot go on Instagram!
What is The Latte Factor?
So this is where The Latte Factor makes its grand entrance. Popularized by author David Bach, the concept is quite simple and uses the cup of coffee as nothing but a symbol. The Latte Factor has nothing to do with a latte! It refers to small amounts of money spent on a regular basis and how it can cost us far more than we can imagine. The Latte Factor is the Capitalist regime’s favorite tool of overspending and the consumer’s idea of an ‘ideal’ and ‘absolute’ necessity. This is tunnel where the concepts of ‘vision’ and ‘long-term’ will leave the car even before you enter. Beware! This is the home of the extravagance and the unnecessary decked up as need and lifestyle.
No matter how simple this is to derive and comprehend, The Latte Factor received a ton of foam in the name of controversy. We all love the sense of inclusivity and the confidence we get parading with a little cup to-go and a logo on our favorite drink. Something that costs as little as $5 or even lesser instantly changes the way you approach the day.
Trouble in Latte Paradise?
As reported by Mandi Woodruff of Business Insider, Helaine Olen has taken aim at the Latte Factor in her book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, she points out the potential issues of considering the concept at all:
- Not all lattes cost you $5. There are memberships, reward points and of course, cheaper options!
- Bach assumed we could earn 10% or 11% if we invested our money instead. Olen believes those returns are unrealistic.
Helaine Olen and most of you frowning as you read this are not wrong. But The Latte Factor hints at a bigger agenda.
For starters, the Latte Factor isn’t about lattes. It’s about any seemingly trivial discretionary expense we incur.
Second, picking on the rate of return Bach assumed may change the numbers, sure, but it doesn’t change important lessons we can take away from all this caffeine-talk. Indeed, this simple concept can teach us everything we need to know to achieve financial freedom, especially if you are a millennial like me, constantly feeling like you are not good enough without a branded cup of coffee or that pang of massive FOMO (Fear of Missing Out) when you see your friend with that branded cup of coffee or how the hell may break loose and everyone will think less of you and your lifestyle if you did not buy that branded cup of coffee.
The Latte Factor is Not Just About Lattes
Of course it’s not just coffee. It may be the designer tote bag every influencer is strutting with and you know a couple of your colleagues that have pre-booked them already. Or it could be the brand new phone that seems like the only thing to take an ‘acceptable’ mirror selfie with. Or the new Italian Restaurant that must be tagged on your feed from the weekend.
The peer pressure is more than ever before — thanks to all the glitter of social media where no body ever seems to have a below average day. You are the byproduct of peek social media, your peer pressure worse than somebody a decade ahead of you. More often than not, you will give in to The Latte Factor. You are only human.
Bach does not champion a primitive lifestyle without these perks. His advise revolves around considering your goals in terms of personal finance, your idea of financial freedom and your ability to distinguish the necessary and the unnecessary with respect to all of the above.
Implementing The Latte Factor
Here’s a few numbers to get you thinking when you queue up to get your cuppa next time:
For example, if you stopped buying a $5 latte each day for 365 days, you would have an additional $1,825 to invest each year. If you invested this much each year for 40 years while earning 5% annual returns, you would accumulate a whopping $231,483:
Or, if you had 7% returns, you would accumulate $389,837:
The Math doesnʼt lie. By investing a small sum of money each day for several decades, you can accumulate a serious pile of cash. The problem with The Latte Factor, though, is that it emphasizes cutting out a tiny expense that is enjoyable for most people as we discussed before. So, despite investing more money each year using this method, your overall quality of life might take a dip. So, here’s a thought.
What could be the opposite of The Latte Factor? Watch this space if you would like to enjoy your overpriced coffee and still not be a victim of The Latte Factor!
Here’s the Top 3 things to learn from THAT cuppa:
- Compounding, Compounding & some more of Compounding, please:
Small amounts of money invested over time turn into a mountain of cash. Let us not assume $5 a day at 11%. Let’s assume $3.50 a day at 6%. That’s exactly what Vanguard did in a recent article. The result over 30 years was $106,000. This calculator will show the results using your own assumptions of amount and return. So, let us all compound!
- A Matter of ‘Habits’:
Some dismiss the Latte Factor because they want to “enjoy” life. We often hear that “life is short” and that we must “live the day.” These clichés certainly have some truth. Yet rarely do I hear people say, “Life is short, I’m going to read a good book” or “Life is short, I’m going to spend time with family.” For some reason, these clichés are always used to justify spending money. Here’s the point. We spend money on things that does not make us happy. It may give us some immediate gratification, but no lasting joy. If we were to run an experiment and shunned our “lattes” for 21 days, I think we’d find that we didn’t miss them at all. That’s true whether we are talking about a cup of coffee, 500 cable channels, or a third car.
- Time:
A Vanguard article recently assumed we invested the $3.50 a day for 30 years. What if we increased that time to 40 years, or decreased it to 20? If we had stopped saving and investing after 20 years, we’d end up with about $48,000, a difference of about $60,000. If we continued investing for 40 years, our balance would grow to $209,000, a difference of more than $100,000. Time matters.
So this is how The Latte Factor works. It’s a tiny little concept, shoved aside by the most, truly understood by few and implemented by almost none. This article probably will not make sense to someone who is already financially independent or someone who already has a FIRE in motion. But when it comes to someone building from the ground up with a big dream to fulfill and a bigger picture in mind, or someone at the very beginning of their career, or someone at the crescent of their professional lives considering a complete change in roles, or someone who just moved to new job, perhaps a new country, or someone who struggles to save because Instagram made him do it — The Latte Factor and this opinion is for all of you to think about.
