It has EVERYTHING to do with your daily latte!

One of the most fought battles in the personal finance blogosphere is unofficially known as the “latte factor”, based on the idea that if instead of buying a $5 Latte a Starbucks every day, you’d instead invest that money, you’d get out of debt and most likely end up a millionaire by age 60.

$5 a day, 5 times a week, is $100 a month. Invested over the course of 42 working years, the investment would bring you about $355’000 assuming a market average return of 8%. Yup, that’s a lot.

But several bloggers like to question the theory. Recently, slate ran an article named The Latte isn’t why you’re in debt, and the people who say it are lying to you. The article is well written, but it criticizes the numbers from a specific book, and uses mistakes in the numbers to try and debunk the whole idea..

But that’s the whole point: the idea. The actual value of the latte isn’t what matters the most. What matters is the mindset behind it.

Recurring costs kill you

Problem number 1 is not that people have a Latte at Starbucks once in a while. The problem is people who get a $5 Latte every day. This recurring cost, as I described above, costs them several hundreds of thousands of dollars over the course of a lifetime. This is a lot, people, and yes, it could help some of us with debt, no question about it.

Latte, of course, is just an example in here. Other people’s “addiction” and recurring expense might be cable TV, a gym membership they never use, the “need” to buy a new phone every 2 years (I’ve been there),  or services that barely improve their life for a small recurring fee.


The Mindset of not questioning your expenses

The Latte factor is more than an example of recurring fees. It’s also a “metaphor” for people who don’t question the cost of tiny luxuries like that.

One of the points of the Slate article is that tiny expenses don’t matter because people should focus on bigger expenses. And to some extent this is true: why would you try hard to save $20 a week on Latte when you just had to pay $1000 for an unforeseen car repair, or when you have to pay $1500 a month for your mortgage?

I was in that mindset myself not so long ago. We got hit by huge hospital bills and had a big mortgage to pay a few years ago. I remember telling my wife “what’s the point of saving 10 cents on a dozen eggs when we just had to pay $10’000 in hospital this year?”.

And really that’s the wrong way to think about it: “I’m already paying thousands of dollars a month on expenses I don’t control, so f… it, I can spend $20 a week on tiny luxuries”. That way of thinking brings two problems:

First of all, saving $20 a week does help you a lot in the long run. That’s more than $100 a year and could help paying for the next car repair instead of going into debt. Or it means paying one month of your mortgage every year thanks to quitting your nasty coffee habit

The other, more problematic result of not being careful about tiny expenses is that at some point it leads to not being careful about any expenses. If I don’t question  my $5 daily latte, I won’t question my $120 monthly cable bill, and ultimately I won’t even question the difference between a $1 million house or a $500’000 house. (Don’t laugh, this is exactly what I did!)

I think Mr Money Mustache referred to it as “flexing your frugality muscle“. Yes, being frugal is totally a muscle. Of course you might have better “wins” if you shop for a cheaper insurance and cut your monthly insurance costs by $200, but this shouldn’t prevent you from trying to cut costs in tiny luxuries just because they are smaller. I actually started with small costs (phone bill, groceries,…) and I know now that I would definitely look for cheaper prices in the housing market if I ever get to buying a house again. Because my mind got trained to try and reduce expenses on tiny amounts, it’s also more natural for me moving forward to reduce bigger expenses.

People who don’t question the cost of their Latte habit are the same people who don’t question bigger costs. I know, because I’ve been there, done that. This kind of behavior could lead to a dangerous spiral of debt.


  1. Andrew@LivingRichCheaply
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  3. Mr. Tako @ Mr. Tako Escapes
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