Why the “Latte Factor” Doesn’t Work

Posted on 21. May, 2007 by in Credit & Debt

I know what you’re thinking, “Blasphemy!” But before you burn me at the stake for preaching against the “Latte Factor” give me a chance to explain.

For those of you who may not know, the “Latte Factor” refers to the little things you can do to save money. If you ever turn on a morning news show where the topic is personal finance, you are guaranteed to find someone talking about this “Latte Factor.” They’ll talk about how if you keep on driving by Starbucks on the way to work (without stopping inside) then you’ll save about $4 a day which saves you about $1,000 a year! And of course everyone says “ooooh” and “aahhhh” because who doesn’t want to save $1,000 a year.

But the problem is, for most people, skipping your morning cup of coffee is not going to get you out of debt or help you save for a house. That’s right, I said it.

I’ve always had a problem with the whole “Latte Factor” phenomenon (I’m even tired of typing “Latte Factor”), but it didn’t really hit home until this week. While my family was visiting I walked in on my mom who was watching one of the aforementioned television segments on personal finance. I saw her furiously taking notes on “How to Save $5,000 Today!” Most of the advice was to skip the little things, while the rest of the advice was just plain ridiculous (who’s really going to give up their cell phone?). I laughed and told my mom to stop writing stuff down. “You want to know how to save $5,000 a year?” I asked. “Sure, how?” she replied.

I began to explain the concept of the “Latte Factor” and why it just doesn’t work. The biggest problem with the Latte Factor is that you are depriving yourself of some of the only things that make you happy. For some it’s a morning coffee. For me it’s dinner with my wife on the weekend. For others it’s that weekly trip to ColdStone for some cake batter ice cream. Whatever your “Latte” is, it makes you happy and brings joy to your otherwise mediocre day. So when people start skipping their morning cup of coffee, they do just fine… for about a week. Then they stop, justifying it by convincing themselves that they’ll save the money another way. Total savings: $20

The other problem is that most people don’t have the discipline to skip the Latte without replacing it with something else. A friend of mine tried to give up soda for a while, because she was tired of spending $2 a day on trips to the 7-Eleven on the way to and from work. But after about a week, she started going to the movies every weekend – justifying spending $10 a week on movie tickets by saving $2 on soda. Total savings: $0

The true way to save $5,000 is to curb the big spending. Everyone has something that they tend to splurge on – for me it’s technology. Every time Apple comes out with a new product I just have to have it. So I end up spending way too much on computers and gadgets during the year than I should. I would have to skip 375 days of Lattes to “pay” for my shiny new $1,500 laptop. For my mom, it’s gifts for other people. While she was here she probably spent $500 on gifts for my kids. You really want to make my kids happy? Take them to the park, or give them a cardboard box – they’ll play in that thing for days!

Tags:

16 Responses to “Why the “Latte Factor” Doesn’t Work”

  1. Josh P

    21. May, 2007

    Man this is soooo true. I’m convinced that saving money is just like dieting for a lot of people.

    They constantly try to find the “quick fix” of cutting out seemingly small things when the REAL problem is that $60k car in their driveway when they only make $40k a year.

  2. AJ

    21. May, 2007

    Technology is my achilles heel as well and you make a valid point. Now excuse me while I go check out those new golf clubs.

  3. Gnorb

    21. May, 2007

    Not to be rude, but I think you’re making a blanket statement. The point of the “Latte Factor” is not to deprive yourself of any fun little things like, well lattes, in the hopes of saving X amount of cash. The point of it is to understand that most of us let too much money slip by on things we don’t even realize we’re letting slip by. For example, the person that eats lunch at Taco Bells or Subway every day, instead of making something from home and eating out once or twice a week. How much are they really letting go (at, say, $6.00/meal) Or the person who stops by Starbucks every morning for a $2.50 cup of coffee and a $2.00 muffin. Or the couple who decides to go out every night for dinner to Subway or Olive Garden, instead of making dinner at home and going out once or twice a week, instead. (These are the couples whose food budget — if they ever look at it — will be something like $250 per week on dinners, not to mention the likely lunches out, or the Fourbucks — err, Starbucks coffee and muffin.)

    In short, the point is to stop throwing money away, not to live in a miserable squalor in the hopes of some day, maybe, actually being able to enjoy something. Please, who wants to do THAT?! The hope is that this money will then be invested or put somewhere where it’ll grow for the saver, instead of sending Mr. Starbucks’s kids to college on Lexuses. Or for older folks, maybe the hope is so that they have enough to, you know, afford to give their grandkids something nice.

    Now why all this? Well, some of us — a good many, I might add — DON’T sit there and make very large expenditures very often. While these spending choices make a huge difference (like financing $4000 for a new big screen TV, or as I like to define it, “The height of financial stupidity”), so do the little things. If a person decides to save $3000 a year by living in squalor, then blows $4000 on a brand new Mac, then what good did all the saving do? In either case the person is in the hole financially.

    People like to control things. They don’t like to be controlled. So if someone puts themselves in a regimen which will take away all the little things they enjoy, that regimen will fail. (Trust me, as a fat person who tried to do without pizza and ice cream, I know. After being able to learn moderation in both accounts, I lost 35 lbs). However, if they cut back on a few of the things which they don’t need, on things in which they spend money more out of habit then out of pleasure, then they’ll find that the “Latte Factor” works for them, so long as they do something of value with the cash saved, even if it’s just sticking it in savings at the end of the week.

    (Sorry for the rant. Keep taking your wife out to dinner on the weekends, but consider cutting back on your version of the latte: tech toys which you may not really need. Since I know nothing about your life, really, this advice is worth exactly what you paid for it, not counting bandwith or hosting costs.)

  4. Lazy Man and Money

    21. May, 2007

    I’m not a big fan of the latte factor, because it’s always titled as “do X, save $Y.” In the case of the show it was a pile of X’s to save $5000. Well, when you start applying those X’s to yourself, you may find that none of the qualify. Before I started writing or reading about personal finance, I couldn’t find any ways to save money on. You get to a point where there just aren’t savings to be had.
    That said, it is a blanket statement to say that the latte factor doesn’t work and I agree with Gnorb about that.

    For everyone there’s a different factor – some people purchase too many small things, some people splurge too much on large things, some do both and some do neither. To save the most you want to be in the last group. Of course that may be the least fun, so you’ll have to balance that if that’s what you choose.

  5. Tamrie Guthrie

    28. May, 2007

    Part of being a grandmother is the joy in being able to spoil your grandchildren when you are with them; and your children. I think that we willl always look for ‘little’ ways to save money to spend money on the things that we want….and yes, Jason, you are the accountant, and I am just the Mom! And I appreicate you input, and counsel, but I will forever have the memories of the pool, the pony rides on grama’s back, the chairs, cooking, with their pots and pans, making aprons for their Mom….
    Have I learned from you about finance? Yes! Have I learned to buy refurbished and save money? Yes! Are you wise beyond your years? Yes! Will I continue to spoil my beautiful Grandaughters? An emphatic Yes! Were you spoiled? Yes! And today, you are loved with all of my heart and soul.

  6. Josh

    04. Jun, 2007

    I completely agree. I recently had a similar realization. Why give up the little things that make life better, when I could just not buy a new car and keep driving my perfectly good old one?

  7. Learning to be moneywise

    25. Feb, 2009

    Well, I was reading David Bach’s book that gave birth to the phrase “Latte Factor”. Nowhere in the book does he recommend giving up on the small pleasures of life – like, forinstance, your weekend dinner with your wife. His recommendations have partly been covered in Gnorb’s response.
    But the other big point that he makes, and that my parents always made, is that we should not live on credit (except maybe for the house) – no buying that Apple gadget with a Credit Card swipe that cannot be settled off in the next month’s statement. Cutting small expenses help – they build savings to make those large purchases on Cash and not credit!!

  8. Ann

    27. Jan, 2010

    You are both right and wrong.

    The way you save money is to live below your means, and save the extra. Period.

    That means…not spending $4 a day on lattes when you aren’t saving enough in your regular and retirement savings…

    AND

    …not spending hugs amounts on tech toys or anything else that is a luxury when you aren’t saving enough in your regular and retirement savings!

    The techniques aren’t mutually exclusive. What the latte factor was trying to teach americans was that our little daily expenses have crept up to a ridiculous high due to boom time luxuries like $4 lattes and $300 cell phone and $500,000 homes that we don’t need.

    If you make 50,000 a year and save $10,000 a year, you’re ok. If you make $150,000 a year and save $50,000 a year, you’re ok. If you make $100,000 a year and save $1000 a year, or nothing, you are in trouble. A ten year old can understand it, we all just need to live it or risk losing our houses (duh) when the economy fails…or living in poverty in retirement.

    Wake up America, it’s not too late.

  9. Bubba

    08. Mar, 2010

    The Latte Factor does work for those with common sense and discipline.

    Spending $5 per work day on coffee and snacks leads to spending $1250 per year on coffee and snacks. Save that money and in three years you will have enough for that big screen TV. Or you could wise up, buy a $150 TV, bring a thermos of home-brewed coffee and a lunch to work and use the savings for something worthwhile.

  10. $$

    11. Mar, 2010

    The problem with the “latte factor” is how much the numbers are skewed by. People assume way to high rates or return on their money and keep them high even when close to retirement age. This is totally false as when we get close to retirement we need to bring down the levels of risk. I gauge a more accurate assessment of how much skipping latte’s can actually save you here … http://livinginvol.com/?p=6

  11. Bryan

    23. Apr, 2010

    Yes the little things in life do bring you pleasure, but I bet when your 70 years old and living on social security you will wish you would have saved then. The book does not say to skip ALL the little things , just a few . I dont drink coffee really but after reading his book I decided to have just $50 a month taken out of my paycheck and sent directly to a mutual fund and let me tell you , it does work! I am rich right now ? No , I am better off then I was 5 years ago ? Yes , if I keep doing this will I be better off? dont know , but a 50% chance of something is better than a 0% chance of nothing.

    This method is easy to do , but also easy not to.

    Do you want to look back 40 years from now and say ” I wish I would have ” Or ” I am glad that I did” Because you will say one of the two evetually no matter what.

  12. Sarah

    31. Dec, 2010

    The latte factor opens peoples eyes to what is needed and what is wanted.

    Sure, you can want a $4 coffee every day or a movie every week, or a dinner out. But if you can’t pay your bills, then maybe you can “enjoy” those treats less.

    It amazes me how many people who don’t have money for rent can manage to buy cigarettes or pay for a spiffy new phone with a $100/month bill. So many people who have trouble paying the utility bills, yet find the money for $130 for cable/internet.(Cable is NOT a necessity, Internet can be gotten for $40/month, IF you need it)

    Once you realize, that they ARE a treat, managing finances are a lot easier. Maybe cut it down to 50% of what you spend now. You still get your enjoyment, but you also get to retire something in the future.

  13. Ricardo

    19. May, 2011

    The latte factor is genius. The idea of skipping it isn’t. The point of the latte factor is to help you save the money and use it for something better. I’m an avid supporter of splurging and wasting money but to do that you have to have money. I know that the partying is more fun when you spend and spend so to be able to do this you have to be stable.
    Bringing me to my point. The latte factor helps you find better balance in your life to the point where you can be a “baller” and make very little money.

  14. Norah

    16. Aug, 2011

    I love what Jason’s mom said. Right on, Tamrie! By the way, I saved $5,000 in one year just by tracking my spending–every single penny AND by cutting back on those lattes, lunch out and a few other amenities (including travel). I also love spoiling people–especially my friend’s grandkids (since I don’t have my own children), and I discovered that I did not have to cut out sharing my love with them. I still buy and send ‘little’ gifts to let them know I care. Whenever a child is born, I send a $25 check to start their college fund. It will probably be worth the price of a sandwich by the time they are ready for college; but it’s a great way to contribute to their future, and it makes me feel great!

    Jason, you have a very loving mom. You are very lucky.

  15. ella

    10. Feb, 2012

    I agree to both. Yes it’s the big things that makes an immediate big difference but over time the small things can make a big difference too. I don’t agree with you as for the deprivation thing. I have stopped buying lattes and is on my 6th week doing that (have bought only 1 in 6 weeks, I would buy 5-6 a week before…) And I really don’t feel deprived cause the latte had turned into a hbit much more than a treat. The no-spend thing I am doing that do compares to the Latte Factor concept actually helped me break a stupid habit that was actually not making me happier or anything like that 🙂

Trackbacks/Pingbacks

  1. Summer Reading | Nadine Dajani - May 20, 2009

    […] I hate to admit it, I’m a creature of habit. The “latte factor” (the theory that there a fortune lying hidden in our little, daily, needless expenses) […]

Leave a Reply