The Latte Factor and Becoming a Millionaire

by David Ning · 30 comments

I love it whenever I hear someone talk about David Bach’s now famous term “the latte factor”. For those that don’t know, the term refers to the idea that many people continually spend on small purchases (like a latte) that add up to a ridiculously large amount over their lifetime.

There are two reasons about it that intrigue me – it’s totally true and it’s totally misleading.

Why Latte Factor Makes Sense

The math is obvious. $3.50 everyday for a year is already over $1,200 dollars. You add the usual compound interests argument over your working career and it’s something like $1 million dollars (maybe a bit less but you get the idea) just on having a cup of coffee.

But the Latte Factor is Totally Misleading

That stat is certainly eye popping. So if I don’t go to Starbucks everyday and I don’t smoke either, I should be able to have $2 million by the time I retire. You may ask yourself that there’s just no way, so why won’t you retire rich?

Side note: a third reason I love the latte factor is that if David Bach is a latte kind of guy, there’s a good chance that he was sipping a hot latte from Starbucks while he wrote that book. I would never know obviously but could you imagine what the press would say about something like that?

The Real Reason You Aren’t a Millionaire

It’s like this. Most people are just happy with following other people’s advice without regards to the big picture. They think to themselves “Wow, I’m not drinking Starbucks anymore so I’m going to save $1 million bucks and that’s enough for me to retire on”. You know what happens to those people? They then buy a plasma TV.

Look. Saving $100 or saving $1 a hundred times is the same thing. Stop thinking that you are wasting money whenever you buy a cup of Starbucks because we all need to satisfy our inner splurge demons once in a while. Instead, here’s how I want you to think about the idea of becoming a millionaire.

The Easy Way to Be a Millionaire and Be Happy

The idea is actually really simple. All you have to do is set an amount of money that you want saved. It could be $100, $500 or even $5,000 as long as it’s based on your long term goals (ie it could be $1 million, it could be something else. Basically, how much you want to retire with). Once you hit that goal (or be able to project that you can easily hit it for the month), why not buy that latte or even an iPod if you really want to?

The real key to wealth is how much you can accumulate but it’s amazing how many people get hung up on how much they are spending. If you ever want to retire comfortably, start accumulating wealth by directly thinking about how much you are keeping, not necessarily about how many pennies you are spending.

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{ 30 comments… read them below or add one }

Michael Thompson March 16, 2009 at 6:21 am

Bach actually admitted that he “borrowed” the idea for the “latte factor” from an elderly couple that came in for retirement counseling once back when he was just a financial planner.

The couple had amassed a pretty amazing amount of money by mainly just living frugally and being conservative with their money/investments. The couple told him that they cut back on the little things, they called it the “cigarette factor” and Bach renamed it to something more chic.

I wonder if that couple is receiving any royalty checks from Bach?

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ObliviousInvestor March 16, 2009 at 6:27 am

“We all need to satisfy our inner splurge demons once in a while.”

Haha. Well said. :)

To me, this is the reason why it’s so essential to have a system of automatic saving/investing. “Pay yourself first” is a cliche, but it works.

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Grant Baldwin March 16, 2009 at 7:01 am

Great thoughts. If you save $3.50 by not buying that latte but then you spend the money elsewhere, what’s the point? Good stuff.

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PT Money March 16, 2009 at 7:05 am

“So if I don’t go to Starbucks everyday and I don’t smoke either, I should be able to have $2 million by the time I retire.”

If that’s one’s take away from Bach’s teachings then they’ve definitely misinterpreted his idea. It’s not sacrificing the actual latte that’s required. It’s sacrificing that amount of money. The point is simply to show how easy it is to save towards millions. I think Bach did his idea an injustice by labelling it the “latte factor”. It’s really got nothing to do with drinking regular coffee vs expensive coffee.

Your last paragraph nailed it. It’s how much you actually save, not how little you spend that’s going to make you your millions.

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FFB March 16, 2009 at 7:17 am

What are you willing to sacrifice? Go get that latte if you want it, just understand you can be doing other things with your money. Same goes for a flat screen tv or a nice car. There’s nothing wrong with these items. But for many they don’t understand what they are giving up in opportunity cost and lots of times they are putting themselves in debt for these items.

I think people have given a latte a bum rap because of Bach but it shouldn’t be the case (and I’m sure it wasn’t his intention for us to never get a latte either).

I think the latte factor is a great, simple example of how to look at your expenses and how you can transfer some of those expenses into savings or investments. Know what you are spending and why and also know what else you could be doing with that money.

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Neal Frankle March 16, 2009 at 7:25 am

AMEN DAVID…… I think that Bach is great – but a much better approach is the one you just articulated. Its set out very well in “The Wealthy Barber” too.

Nice job man.

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NHMatt March 16, 2009 at 10:10 am

FFB hit the nail on the head. The “latte factor” was just a small example to illustrate a point. If looked at broadly (all potential non-essential expenditures), the point makes definite sense.

Also, the two numbers (what you save vs. what you spend) are directly related to one another, when summed = total income.

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Moneymonk March 16, 2009 at 12:33 pm

I knew his book was talking about generalities. I save 30% of my income and live off the remaining 70, that plan has always worked for me.

However, I do get what concept David Bach was trying to make, if you doing to indulge, indulge in your 401k plan and emergency savings

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B7 March 16, 2009 at 2:14 pm

I agree 100%. The whole latte thing is just silly. Anyone who thinks that forgoing a latte will make them a millionaire is clueless. Here’s why.

There are much better ways of becoming a millionaire. For example, what about creating a blog that makes $3.50 a day? That’s enough to start someone on the path to millionairedom.

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Chiko777 March 16, 2009 at 7:08 pm

I agree, hence I am working on creating passive streams of income in order for me to retire at a young age. Retirement is not about how old you are, it’s about how much money you have or have coming in on a regular basis.

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Cheapchick March 16, 2009 at 7:54 pm

Each and every financial guru has some sort of Latte Factor …they each just call it something different. What they all have in common is the “sweat the small stuff and the big stuff” factor (again borrowed from many a finance guru). What true millionnaires do is consider where their money is going before they spend it and in order to really make the big money you must save money and invest money. Simply saving a couple of buckis on a Latte is not going to do it. What it will allow you to do is live better on what you make.

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Craig March 17, 2009 at 1:31 pm

It works in theory but not in the big picture. People don’t put away money on a daily basis and have interest grow. If anything, they probably would put the money towards other bills or debt they may have.

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NHMatt March 18, 2009 at 7:02 am

The “rule of 72″ says 72/5 = 14.4 years to double that money at a return rate of 5% annually.

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Perfect-Money March 19, 2009 at 1:43 am

I think harder to typed it rather then do it out in the real way,for me ,what make me spending is sometimes because I cannot handle the pain of “waiting ,it seems time so slow in waiting,yea I save,but my saving is a back up only ,and about advice how to be millionaire above,all I can do just focus to use the money I got now to “capitalize my ability to gain more money,with investing ,marketing or saving it traditionally in a stock or options

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Play Games Win Prizes March 20, 2009 at 12:55 pm

The article makes it seem easy to “save”, but at times, it really isn’t that simple. Everyone throughout their life spends over millions of dollars, but just don’t know it.

-Mike

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TStrump March 21, 2009 at 4:38 pm

If you cut too many of the ‘small items’ then life isn’t much fun, and you may end up binge spending, which is worse. It’s happened to me.
So have that coffee or latte every once in a while … they do add up, though.

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Jason Unger March 23, 2009 at 7:51 am

Of course, the whole latte factor thing leaves out the biggest wealth destruction you’ll see over time: inflation.

Who knows if having $2 million in forty years will be worth anything at all?

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Hannah March 30, 2009 at 10:00 am

Here’s the problem: the Latte Factor idea assumes that you are buying lattes every day. Ok, I know there are people out there who do, in fact, buy lattes every day. But I’m sure it’s already occurred to them that they could save money by cutting the java out. Telling someone to save money by skipping their daily latte is like telling someone to lose weight by taking the stairs instead of the elevator: Duh. Anyone who has ever picked up a magazine or watched the Today Show has heard those ideas before. Read more of my thoughts on this here:

http://monogamoney.wordpress.com/2009/03/30/the-latte-factor/

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Rex Giga April 25, 2009 at 7:51 pm

I think that saving money by focusing on small things like lattes is a waste. Shouldn’t you focus on big things like car purchases, house purchases, whether or not to have children, etc? Furthermore, lattes may be healthy for you. Medical studies show that those who drink the most coffee have the lower risk of type 2 diabetes, cancer, and heart disease.

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Gary January 27, 2010 at 6:36 am

I get the point. We must pay attention to habit spending….Cigarettes, candy, snacks, drinks, LATTE, etc., and realize the long term expense. Saving $3.50 a day is only part of it……checking the explosive expense such as your gas to get to the latte, and the time you waste, the opportunities you miss, the other values you could have , and the fact that $3.50 saved vs $3.50 spent is a $7.00 turn around for your money. $3.50 could equal over $10.00. Savings is great, but on the need side, one can justify large purchases by matching this latte amount to the item they just bought, and feel good about it.

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Stew August 29, 2012 at 6:35 pm

That’s an intelligent answer to a difficult question.

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$$ March 11, 2010 at 7:18 pm

Yes. Thank you. The latte factor is complete nonsense. It’s one of the cheapest paid forms of pleasure (since the “best things in life are free”) that you can have. Don’t buy a latte, but go buy a plasma tv (only to switch to a 3d TV two years later)…haha…. The thing that really cracks me up is people that assume they are going to make a constant 10% on the money that they save on latte’s which is completely unrealistic, especially as you age and need to get conservative when close to retirement. I make much more accurate estimations of what skipping that morning latte will do to your retirement account here…

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Joe May 6, 2010 at 2:24 pm

Actually….it was never bach this whole time. It actually came from when Dave Ramsey was a finical planner back when he was young. You can read all about it in “Automatic Millionaire”

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Richardo August 28, 2010 at 7:26 am

I see my daily latte as a necessity. It’s a performance enhancing drug that helps me focus on work. There are medical studies that show that those who drink six cups of coffee per day reduce their risk of getting diabetes by 50 per cent. It is a good source of antioxidants. If you chose to have your coffee with no sugar, it is one of the most healthy drinks available, certainly healthier than soft drink. It is also a humanitarian beverage because most coffee is harvested by poor people. Buying coffee supports the employment of the world’s poorest people.

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Ed December 10, 2010 at 1:43 pm

I agree doing away with something like a latte a day could add up to a lot of money over a life time, but we not sure how long we will live, so I want to keep at least one bad habit that makes me happy just in case my life time is short. That doesn’t mean I wouldn’t save money though.

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Fru December 16, 2010 at 1:43 am

The Latte Factor is a real eye opener for me – its not something that ordinarily I would stop and think about but seriously the amount you save by stopping buying unnecessary rubbish is unbelievable.

I now bring coffee filters into work and use them. Price for 10 – circa £2.50. Which is the price of a normal coffee in the shop downstairs.

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Brian January 8, 2011 at 5:57 pm

you can pay $3.50 for a latte…. or you could spend $3.42 – 50c coupon = $2.92 on an 11-oz bag of Eight O’Clock 100% Colombian whole bean coffee, which yields roughly SIXTEEN ultra large 14-oz thermoses of coffee per bag.

Make your coffee with a Bodum french press, adding just a smidgeon of skim milk to the top, and you’ve got a large 14-oz morning coffee that is healthier than the Starbucks and costs a paltry *18 cents* per cup ($2.92/16 = 18.25 cents)

18 cents for a better-tasting, richer, healthier cup of coffee… vs. $3.50 for a wasteful less-healthy lattee from Starbucks. Fewer things in life are as slam-dunk as this…

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K.C. February 1, 2012 at 3:29 pm

Okay, it’s how much you put into savings, not what you spend that counts. But how do you come up with the money to put into savings unless you take a look at your spending? Opportunities to achieve the saving goal lie in what is being spent. For most folks, spending has to be cut somewhere in order to realize their savings goal. Small everyday incidentals that result from what is often called “unconscious spending” provide an opportunity to free-up money for saving without having to make major lifestyle changes. Bach’s point is to make us conscious of those opportunities.

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Bob October 30, 2012 at 12:46 am

The top article mischaracterizes the latte factor. The advice given by Bach is that people should automatically save (via payroll deduction) say, $100 a month. The person receiving this advice says, “Well, I don’t have $100 a month to save.” Enter the latte factor, and most people can easily find $3 to $4 a day in trivial and avoidable spending. So, the answer is, YES, you can save $100 a month. The trick is to set up an automatic system (“pay yourself first”) to make that happen. The fact that people don’t do this is where the top article has it right.

But again, pay yourself first is the motivating idea, and the latte factor is to counter the objection.

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Garry kerr June 27, 2014 at 7:18 am

Something like a latte a day could add up to a lot of money over a life time. Telling someone to save money by skipping their daily latte is like telling someone to lose weight by taking the stairs instead of the elevator.

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