The Latte Factor; Why Spurning Starbucks Won't Make You a Millionaire

If you read personal finance articles (or for that matter watch any daytime talk shows) at some point or another you will hear about the "Latte Factor." The Latte Factor is based on how much money can be saved over a lifetime by eliminating daily discretionary purchases--for example Starbucks Lattes or bottled water. The concept has been promoted by personal finance guru David Bach.

From David Bach's website:

$5 per day (the average cost of a latte and a muffin) x 7 days = $35 per week

$35/week = $150/month

$150 per month invested at a rate of 10% annual return =

1 year = $1,885
2 years = $3,967
5 years =$11,616
10 years = $30,727
15 years = $62,171
30 years = $339,073
40 years = $948,611

The key point of the Latte Factor is that you can "make" a million dollars just by skipping something as nominal as a daily latte and muffin. It is a snappy point that makes a great sound bite for TV news programs. The problem is that it really doesn't work.

First off is the problem of the rate of return they are using. A 10% (after tax) rate is beyond aggressive (and more than double the pre-tax rate featured by one of their advertisers on the very page explaining the Latte Factor). The second problem is that while $1 million 40 years from now sounds like a lot, the present value of $948,000 in 40 years (using the same 10% discount rate they did in the calculation) equals just $21,000 in today's dollars. (Of course in their favor is that they do not increase the price of the coffee and muffin over 40 years. It is hard to believe that walking into a Starbucks in the year 2047 will ee a latte or anything else for that matter at $3.00).

The biggest problem with the Latte Factor however is that it doesn't work. The reasons why were explained by this personal finance blogger:

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

So how does one save money if it isn't cutting out the "little" things? There are many ways, avoiding credit card debt would be near the top as is eliminating even one "major" purchase that you make (the blogger above noted that they have a weakness for buying too much technology and that the nice laptop they just bought equates to 375 lattes.) The important point is that spurning a simple pleasure that you enjoy is rarely a sustainable strategy--just look at the success rate of most weight loss programs. Don't be fooled by someone telling you that you could be a millionaire by cutting out your Starbucks coffee, solutions to difficult problems are rarely as simple as that.