The Latte Factor: Fact or Fiction?

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The Latte Factor Explained

Frugality does not automatically imply you need to move out of your house, sell your car, ride a bike and live in a tent for the rest of your days. Frugality does not have to mean extreme deprivation.

In the financial independence and frugality community a term referred to as "the latte factor" has arisen. The literal translation of this is if you saved the cost of a latte and instead invested it, that over time you would become rich. I suggest that we can expand this beyond its' literal meaning however. Your "latte" could be any recurring expense, it does not have to be an actual latte.

Note: I believe the term latte factor originated with author David Bach. He even has written an excellent work titled The Latte Factor: Why You Don't Have to Be Rich to Live Rich.

The Long-term Cost of Everyday Expenses

At last, here is our latte factor calculator demonstration. Use the following to plug in your own numbers and expenses to figure out how saving small amounts can generate wealth over time.

First, figure out what your daily "latte" expense is. Perhaps it is literally a flavored morning beverage, but I suspect for many it is something else. Do you buy lunch everyday? A pack of smokes (saving money is another reason to quit)? A donut every morning? Essentially, what is the item that you immediately identify as a regular expense that you purchase at least once every few days, if not everyday?

Figure out how much that item costs you every month. Then take that monthly expense and plug it into this calculator. 

Say I purchase a sandwich at work everyday at work. Say that sandwich costs $7. What if, instead, I could make lunch for $2 and bring it to work instead of buying that $7 sandwich? The answer to the riddle is that you would save $5 on lunch. Following me so far?

Now take that $5 per day and assume that you have approximately 20 workdays per month which you would save that $5. For simplicity sake, that means we will save $100 just by packing lunch. Not bad. But it gets better.

​Take that $100 savings per month and instead invest it in a low cost index fund. According to the compound interest calculator- assuming an 8% annual return- packing my lunch for 20 years would result in saving a total of $54,914 instead of spending $24,000, which is a $78,914 difference.

Further, if I did this for 30 years- assuming an 8% return annually compounded- I wind up with $135,939 instead of spending $36,000, or a $171,939 swing!

Packing your lunch for your working lifetime could open up $136,000 for you in the future or wind up costing you $36,000- the choice is yours!

Such a simple example yields over $100,000 difference over the span of 30 years.

Just assessing your lifestyle habits from a true monetary cost-benefit perspective will change your mindset. It has the potential to train your brain to think differently about seemingly innocent recurring expenses. It might even eventually make you frugal.  

Taking this one step further, imagine you are able to find more than one item to save on over a lifetime. Now use the example above to calculate how the recurring expense of a particular item could instead be utilized to harness the power of compound interest.

Deprivation vs. Frugality?

The most common rebuttal to compounded savings is the concern that you will be depriving yourself. Yet that is not the point!

The point is that by choosing to limit yourself for a definitive period of time- like packing your lunch instead of that delicious hoagie for lunch everyday- you can ultimately choose to start purchasing that item again someday. The difference is that by limiting yourself for a defined period of time, when you ultimately choose to start spending that money again, you can restart the original behavior and then some! You can have your sandwich, and a new car, and a boat if you so choose. How? Because you chose to not spend on something for a defined period with the ultimate expectation to gain far more in the long term. This is the classic marshmallow experiment in action!

In 1972, a study was published from a group of researchers out of Stanford which later became know as the "Stanford Marshmallow Experiment". In this aforementioned study, children were given the choice of having one marshmallow immediately, or avoiding eating the first marshmallow until the researcher returned to the room in exchange for receiving two marshmallows.

On average, the students who avoided eating the first marshmallow in exchange for two marshmallows later (i.e. those that demonstrated delayed gratification):

​-More academically and socially competent, verbally fluent, rational, attentive, planful, and able to deal well with frustration and stress. Source

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• -Higher SAT scores. Source
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• -Lower rates of Obesity 30 years later! Source

​That's the power of choice. That is the power of delayed gratification.

Ultimately the choice to be frugal now is because you can. Because you will never be younger than you are right now. You can possibly handle more now. Work more now. Cut spending more effectively right now. Delay your gratification. That's what frugality ultimately is!

Leave a comment below. What's your "latte factor" item? How do you anticipate this delayed gratification to benefit you in the long term?