Updated on 03.07.07

# Exploring The Latte Factor: What A Latte Really Costs You

A reader wrote to me recently and expressed some serious doubt about the “latte factor.”

I understand that I could be putting the money from a \$4 latte into retirement but I don’t get why it’s important. I would rather have a latte than have \$4 when I’m old.

Let’s break this down into pieces so that the concept becomes clearer.

If you walk into a coffee shop on your 25th birthday and plunk down \$4 on a latte, that \$4 goes away. If you just took that \$4 and stuck it under your mattress for 40 years, you’d just have \$4 when you’re 65. But if you took that \$4 and put it in an investment that earns 5% (like a treasury note) for 40 years, you would have \$28.16.

Okay, let’s say that you drink just one latte a week for just your 25th year on earth. That’s 52 lattes, a total of \$208. In that same investment, you would have \$1,464.32 when you’re 65.

Let’s say again that you buy a latte a week until your 65th birthday. That’s 2080 lattes, which costs a total of \$8,320 (and that assumes the price will not go up for 40 years, which means it’ll be more than that in reality). With that same investment, you’d have \$26,590.67 at age 65.

Let’s say that you drink three lattes a week (not unreasonable for a latte drinker). That’s 6,240 lattes, which costs a total of \$24,960 (again, with no price increase). If you just buy that same 5% investment, you would have \$79,772.01 at retirement.

Now, let’s say instead of buying a treasury note, you put that money in the Vanguard 500, which has earned 12.14% annually since inception in 1976. If we can expect that same return, you will have \$558,690.42 at retirement.

Drink a latte daily? You’re losing \$931,150.69 at retirement. A morning latte and an afternoon latte? \$1,862,301.38.

This is the power of the “latte factor.” It’s not a single choice to buy a latte that’s powerful, it’s a regular purchase of a latte combined with the power of compound interest that makes it powerful. Obviously, the huge numbers quoted here are indeed in future dollars, but even with 4% annual inflation, you’re still tossing away \$387,897 in today’s dollars just on your two lattes a day. That’s the foundation of a good retirement, tossed away on a frivolous part of a daily routine.

1. Chris says:

The trick that has worked for me, more than anything is just budgeting for ALL the latte factors in my life. I give myself 100 dollars a week to cover everything from entertainment to extra eating out, to clothes, to other misc stuff. Knowing that I can drink a latte if I need a pick-me-up in the morning has been powerful in keeping myself from overspending. I just keep in mind that buying something else will have to wait a week.

2. Eddy E says:

It’s not just about overspending, but to recognize that all luxuries (small or big), all addictions (small or big), have long-run costs. Thanks for the post.

3. David says:

I love this blog and have been reading it for a few weeks now. Great stuff.
That said, I believe there is a balance here that you’re not addressing. Sure you could cut out all of your lattes for the rest of your life and put that money away and make a million, but the same could be said for lots of things. Cancel your cable TV and put that money away, put the thermostat to a minimum and wear coats in the house and then put that savings away, never eat out and invest that money instead. There’s no question that we could all be multi-millionaires at 65 if we rid ourselves of everything but life’s necessities and invested all of the excess money. But then, you have to ask yourself, is that the kind of 65 years you want to live?
The extent that you live frugally today to live in a mansion retirement home tomorrow is a personal choice. As for me, I’ll continue with my occasional lattes, and also continue investing for retirement (increasing the amount invested with every raise and bonus).
[As a side note, I’ve discovered that with a quality burr coffee grinder, decent espresso maker, and cheap French press, I’m able to make coffee drinks that are better tasting than Sbucks and other coffee houses. And, it’s cheaper in the long run, to boot.)

4. This is a great explanation.

For me, the key is to think in the long-term. I don’t deny myself luxuries completely, but it’s good to realize what they’re costing over time.

5. TFB says:

If you follow this logic, then why spend money on anything? Don’t go on vacation. Don’t buy music. Don’t spend money on clothes or shoes. Buy everything from Salvation Army. Show me any expense you have now, I can show you how much more you will have when you retire.

6. Luke says:

I simply dont get it…Should we all starve and not enjoy our time on earth? If I save \$1200 a month into brokerage and retirement accounts, should I not be allowed to reward myself with 1-2 lattes a week? Should I feel regret when I enjoy a green tea latte from Starbucks? I am genuinely confused by this notion…

And this comes from a guy who is known as frugal and a HUGE saver that annoys everyone with saving tips all the time…

There is a point where it gets silly and suggesting that someone drinks a coffee/latte once a day as a source of enjoyment is “passing” up \$500K at retirement is a strrrrreeeeettttttccccch…

7. Trent says:

Luke, every latte you drink is a choice against saving for some other goal. It’s a judgement call you have to make. At no point did I say that anyone should stop doing things they enjoy, but that they should realize that these activities do have long term ramifications, and that simple small lifestyle changes can uncover a lot of money that is bleeding from a budget.

8. plonkee says:

I get it, I really do.

I still think that there is a point to be found in the original questioner. I want to live the life I want now as well as in the future and I’d rather fritter away a budgeted amount of money than deny myself for 30-odd years in order to have lattes then.

9. Craig says:

For those wondering why you should deny yourself all the little luxuries now in order to benefit at some point in the future, I don’t think that is the ultimate goal of the “latte factor” concept. I see it as simply saying, “if you want to save some money, here is a quick and simple way to start doing it”.

Being aware of the latte factor means that should the day come that you are looking to find some easy savings in your budget, you should know the first place to look, all the small, (semi)regular luxury items in your life.

The way I look at it is, if you want to spend the money on a latte (or other small “luxury” item), then thats fine, but it pays to be aware (and many people aren’t) of the large amount that a lot of little transactions can add up to. And that’s disregarding the compound interest side of things and just measuring in savings from money not spent.

A lot of a little is still a lot eventually.

10. jake says:

I originally felt the same like many of you. I wanted my latte, I wanted to enjoy my coffee in the morning.

Then after really sitting down and investigating my finances it was a real eye opener.

If I saved a little here and a little there, and put that towards an investment that had good returns I can have a big chuck of money in a few years or a few decades.

I came to accept the idea not as something to mean live cheap all your life. I have come to accept it as something that allows me to see what investing can accomplish.

I can tell you stories of people who have saved up money for most of their lives, sacrificing everything, only to die and not enjoy a cent.

But I can tell you stories of people I know now that are reaching retirement and they are scared to death. These people don’t have any savings, don’t have any retirement funds, and they don’t have much of any family support. Meaning they are alone, living on their own.

Also I want to add that the latte factor does not mean for you to give up on coffee. It gives you an insight into how much you are spending on say a place like Starbucks. Given that realization you can then seek alternatives like buy coffee and make it at home, or find some other store that sells cheaper coffee.

The point is that it makes you look closer at what you’re spending on and tries to get you to say to yourself, “Do I really have to drink at Starbucks, can I just make my own or buy somewhere cheaper?”

11. Luke says:

Trent…Do you do that for every meal, drink, gift, jacket, candy bar? I pick up a Snickers bar for .89 and a hot chocolate for 1.49 after being so busy I missed lunch and I should first think about my future savings goals and how purchasing this item will affect me in 30-years? I am seriously just curious about this…

When does this thinking get silly? Like I said, if you are saving 50% of your income or whatever many here are probably doing here and you have some extra cash every week, should you NOT spend it on life, but instead add it into more savings? The scrutiny of small finances like this on a daily basis makes my head hurt as it is…SOmetimes rewarding yourself with a THREE DOLLAR latte after saving like a monster is OK…

I am ALL about saving for retirement, I really am, but not this nuts…

Jake…Should you not reward yourself with small indulgences for saving and doing everything you should for savings and retirement? By seek alternaatives, what do you mean?

12. Michelle says:

Wow. I’d expect these reactions if the post were on a randomly chosen web site, but not here. Trent writes about frugality — perhaps you guys never noticed?

It’s all about informed choices. If you love your lattes so much, fine. But don’t just parrot the slippery slope argument, which only applies when judgment is removed and policies become automatic and absolute. You, as an individual, decide when additional frugality measures are worthwhile and when they are not.

13. Luke says:

Fair enough Michelle…I love this site and I really enjoy Trent’s tips…Especially the one today about car insurance covering the engine…

The slippery slope you speak of is exactly what I think many do with the latte factor…Saying if you save \$1.00 into “some fund” making “10%” for every day you’ll have \$500K is a stretch imho…

I get the jist of it, but like Craig said if you aren’t saving money and say you can’t, here is an easy way to save \$20/week…It’s NOT to take folks, who are insane savers like all of us here, and have every small purchase broken down….

In short, the latte factor is purported EVERYWHERE and I think its time as a tool to help save is done with….at least on high quality financial sites like this and others…

14. Jeff from LA says:

Well, the statement that \$4 saved at a 5% rate for 40 years equals \$28.16 is true, but highly deceptive because of inflation. In times of high inflation, as we seem to have now, \$28.16 will not be worth much in 40 years. For example, let’s assume that inflation averages somewhere around 3%, that means that \$13.05 of the gain will only be used to keep up with inflation, meaning that the \$4 will only have gained \$15.11 in that time. If inflation tracks even higher than that, your gain would be even lower.

15. James says:

Moderation is the key to life! A few Lattes are ok, but also invest in your future.

James

16. Kevin says:

It’s called opportunity cost. We can’t forget to live. But we can choose to live a life that generally speaking, other are unwilling to live so that in the end, we live like the others never can.

17. M.F. says:

I once drove up to a coffee shop window by myself and ordered two lattes–one short skinny, one tall skinny. When the girl at the window handed me the short skinny, she said, “Here’s your’s.” “How did you know this one is mine?” I said. “Women know moderation,” she said.
The point is, moderation in all things is what we need to keep in mind. Moderation in frivolous spending, but moderation also with such frugality that you can’t enjoy living. There are no guarantees you’ll live long enough to enjoy all that money you saved from denying yourself a treat now and then. Life is short. Enjoy it while you can, within reason.

18. Lisa says:

I think the key thing to understand here is that of course you can (and should) permit yourself some luxuries and treats in your life, but the only way you will EVER be financially independent is if you live below your means and save more than you spend. It’s very simple — if you make \$30,000 a year at your job but think you can afford an expensive luxury car, a home in a trendy, expensive neighborhood, an expensive watch, the best clothes, and eating at the hippest restaurants five nights a week, you’re deluding yourself. Most people who live way beyond their means are trying to give the impression of wealth to other people (usually strangers), but trust me, strangers couldn’t care less and you’re not fooling the people close to you.

So think about which luxuries really MATTER to you, plan for them, save for them, and then enjoy them. Prioritize your treats; if you think about it, once you’ve drunk that latte, it’s gone forever. If your job pays you \$20 an hour and the latte was \$4.00, you had to work 20 minutes to pay for that coffee, and all it was….was coffee. I don’t know about you, but to me, that’s no luxury.

You know how I define luxury? FREEDOM. My husband and I are in our mid-40s, have never had ultra high paying jobs, and are set to permanently retire from full time work in the next year with a net worth (excluding our home) of well over \$2.5 million. We live in a very comfortable home, have very nice, high quality things (all paid for with saved-up cash, and no fancy cars!), take one fabulous vacation every year, and generally enjoy life a great deal while steadily investing about 35% of our income and living well below our means. And yet, in about 12 months, I will not ever again have to sit in an office at a job that bores me to tears. I can take any job I want, do anything I want, without ever having to worry about what it pays. FOR THE REST OF MY LIFE. Now if that isn’t luxury, you tell me what IS.

i think when people refer to the “latte factor”, they are not referring to the occasional treat. Instead in my experience, I had a 21 year old colleague who was working an extra job in addition to her day job in order to pay off her student debt. She would complain a lot about her financial situation.

and yet in her hand there would be a fresh sbucks morning, noon, and night. isn’t that 20 bucks a day? that could be going towards her debt? i ddidn’t understand why she didn’t buy a coffee pot.