The Latte Factor. 3 simple words with the potential of really splitting people across the middle. Just google “The Latte Factor” and you will get a multitude of opinions. I thought of chiming in and adding my voice to the chorus.
WHAT IS THE LATTE FACTOR?
The latte factor is a term originating from the personal finance best seller – “The Automatic Millionaire” written by David Bach. The automatic millionaire essentially outlines small changes one can make to his or her life to end up being a millionaire.
The latte factor is one chapter which has probably gotten the most attention in the entire book. The premise is simple. There are enough of us who start our day with a pilgrimage to Starbucks or maybe even a Café Coffee day for our daily dose of caffeine. Bach put in numbers to that habit to say how ditching the habit over your working life and investing that money could make you a millionaire.
Calculation behind David Bach’s claim that ditching buying your daily cuppa can make you a millionaire
NUMBER PLAY FOR THE LATTE FACTOR
Bach assumed that every visit would involve a cup of coffee and a fat-free muffin. He put the figure of $5 to each coffee shop visit.
When you calculate it for 365 days it comes to $1825, which Bach rounded off to $2000 an year.
If you are a 23 year old with this habit, assuming you retire at the age of 65 (the American age of retirement), investing $2000 every year in an index fund with average returns of 10-12% over your working life of 42 years would result in a retirement corpus of $1,075,274 – $1928719, essentially between 1 and 2 million USD.
CRITIQUE OF THE LATTE FACTOR
Like almost anything which makes people question a habit, there are more than enough critiques for this idea, surprisingly none of them being Starbucks itself :). The points made in the critique are many:
- Index funds no longer earn 10%
- Coffee at these shops is cheaper now and no one spends $5 every day
- It is pretentious to round it off to $2000
- His calculation does not take into account taxes and inflation
- People will stop drinking the coffee but spend it on something else
- My cup of coffee provides me much more value than what I spend on it
- I get a lot of work done in a coffee shop so it doesn’t make sense
HOW TO MAKE THE LATTE FACTOR WORK FOR YOU?
Personally I believe the latte factor has merit, albeit taken with a pinch of salt. Use just the following 3 ways to make it a more effective strategy in your personal finance roadmap:
Still think “The Latte factor” is hogwash? Or think that it works very well but could use some help implementing it? Let me know your views in the comments below or email me at [email protected]
Critiques of the Latte Factor taken from:
