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.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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