The following is a guest post.

David Bach coined a term in his book Finish Rich called “the latte factor.”  It is the simple idea that the small trivial things we spend on everyday adds up to an extremely large amount over time.  The “latte factor” is actually somewhat of misnomer as it covers a lot more than lattes.  It can be the candy we buy to snack on out of sheer boredom. Or the cigarettes we buy because we just can’t shake the nasty habit. Or the subscriptions to the magazines we don’t read but are too lazy to cancel.  Heck it can even be the miles that we drive to work everyday.  The latte factor is the unconscious spending on the little everyday things that do not add any value to our lives.  Let’s discuss more about the latte factor and how it can help us get a better grasp of our everyday spending and save a bunch of money at the same time.

## The Math Behind The Latte Factor

The math behind the latte factor is pretty solid and makes absolute sense once you think about it.  A latte at Starbucks costs \$4.

Let’s say you save that \$4 instead and invest it.  40 years down the line, that \$4 becomes almost \$30 if it grows at 5% annually.  How about growing at a rate of 8% annually for 40 years?  That’s \$98.10.  That’s right.  \$4 growing at 8% interest turns into \$98.10 in 40 years, compounded daily.  Just go ahead and plug those numbers into any compound interest calculator and you will invariably get the same results.  So while you are spending \$4 on a latte everyday, you are actually foregoing \$98.10 in future income.  Of course you can’t simply just put in \$4 here and there into an investment account (as that would cost than your actual investment).  But the point is to think about what that \$4 means in the future.

How much do you spend on frivolous items weekly?  \$100?  \$200?  I know for years my latte factor was eating out during lunch.  I ate out at lunch almost everyday.  I ate out because I was too lazy to make food at home.  It wasn’t because I didn’t have time—it was just that I didn’t want to be bothered to go to the kitchen to make some food for work the next day.  So each week, I would spend about \$50 on lunch.  For a month, that’s about \$200.  For a year, that was \$2,400 in lunch.  Instead of eating out everyday during lunch, I could have saved that \$2,400 and invested it at the end of the year.  What would that \$2,400 be at the end of 30 years, growing at an annual rate of 8%?  That would be slightly over \$26,000.  What about 40 years?  That would be almost \$60,000.

The latte factor teaches us about the dangers of habitual, unconscious spending.  Spending \$3 here and \$5 there won’t mean much during the transaction.  However once you get a bird eye’s view of your daily spending, it will present a much clearer and more ominous picture of your personal finance habits.

Recognizing the latte factor has to do with changing the very habits that we act on every day.  Changing habits does take time but it helps if we are able take a long-term macro look at our spending.  Often we rationalize our actions by saying “oh it’s just \$2 this one time.  I will be the last one this month.”  However, will it be?

The latte factor isn’t something that is going to make us rich (alone).  However, it is something that can save us a whole lot of money and it is something that can bring about discipline in our spending.

To figure out how much you will save with the latte factor, use David Bach’s latte factor calculator.

To see how big of a saving it is, just go ahead and plug in the numbers into David Bach’s calculator.  Instead of spending that \$10 a day on different small item purchases, if you were to put that into an investment that yielded a 6% return on your investment, over the course of 20 years, you will have accrued \$142,323.45.  You can try out the latte calculator for yourself and see how much your latte factor is costing you.  This scenario is calculated on your right.  Saving \$10 a day is not that hard.  At the end of the month, it is just \$300.  Saving \$300 a month becomes a lot easier once you start realizing a lot of the spending you do on a daily basis does not bring about any type of long term value.

## What It Means To Take Control Of Your Latte Factor

Taking control of your latte factor means the willingness to give up on the little things for the sake of big wins (those that bring long term happiness and value).  It calls for discipline of your spending habits.

However, a total stoppage of something we enjoy and do everyday is extremely hard.  And honestly, I do not advocate for that, and I don’t think David Bach does either.  I do love my occasional Starbucks or lunch at a restaurant—and calling for a total stoppage is somewhat impeding my freedom to enjoy a little bit of what my money affords me to do.  I do not advocate hording all your money until retirement.  What is the point of earning money if we cannot enjoy it right?  That is why changing our spending habits involves little adjustments, instead of complete 360 changes.  Instead of having a coffee everyday, you might try having it every other day and then bring coffee from home on the days that you do not buy coffee.  Or instead of eating out for lunch everyday, try eating out every other day.

The fact is that some of the small everyday items we buy are some of the simple joys of life—and the joys of being able to spend the money we work hard for.  The true purpose of the latte factor is to look at our everyday spending and see how we unconsciously spend on things that do not matter to us and brings us no long term value or joy.  That is the stuff that we should work to eliminate.  Everyone has their thing that they love spending on—be it latte everyday or shopping every weekend.  I don’t think we should just stop spending on what we love for the sake of compound savings 20 years down the line that we might not even see.  The main point is to isolate and cut frivolous spending and cut back back on things that does not provide long term value.  Cancel that gym membership that you don’t use.  Cancel that subscription to the WSJ if you only read the premium version a couple of times a month.  The point of the latte factor is to not make you rich—it is an idea used to make more conscious spending decisions.  Curbing unnecessary spending, actively saving money, and investing wisely can make for a very fruitful retirement without having to totally abstain from enjoyments of our youth.

## Some Common Things You Should Think About Cutting Out To Save More Money

Eating out and coffee are some of the first things to cut down on when people first take control of their daily spending habits.  But there are many other things we can do to save more money everyday.  If you only go to the gym once every other month, maybe it is time to cancel that gym membership.  Instead of driving to work everyday, maybe you can try busing to work or finding a carpool partner or a vanpool. You don’t watch most of the channels on your tv?  Perhaps you should cancel the overpriced cable subscription and get Netflix and/or Hulu.  If you have an individual cellphone plan, you should think about bundling with family and friends.  These are just a few things we can all do that can save us literally a few hundred a month.  Take a look at your spending habits and see what kind of unnecessary spending you can cut out of your life.

## Saving With A Purpose

We have talked about the latte factor as a way to save and think about money.  However, we should really know why we are saving and abstaining…right?  As Ramit Sethi said in his book I Will Teach You to Be Rich, saving is most effective when you have a goal.  What are you saving for?  What is the ultimate reason you are foregoing that cup of coffee today? Without a purpose, foregoing a cup of coffee hardly seems worth it (to me).  However, if I tell myself that I am giving up this cup of coffee today so that I can have more money for the down payment on my house, then it excites me and gives me a real goal in saving—a real purpose.

The big takeaway from the latte factor is to find out what really matters to you and what really doesn’t and putting your priorities in order. The road to financial wealth won’t be easy, however,  knowing what you need and what you don’t need will really help you as it might save you from taking out a loan or spending too much on your credit card. Remember, save wisely and with a goal.

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