Latte with a heart

The Latte Factor: Save Instead of Spend

Do you love a daily latte? Would you give up that daily latte for a better financial future? This choice, sometimes referred to as the Latte Factor, may not seem like it would have much of an impact. In reality, it can do wonders for helping you to reach your short- and long-term financial goals.

What is the Latte Factor?

The Latte Factor is a concept popularized by author David Bach. The idea behind it is that the little things you regularly purchase can cut into your budget more than you might realize.

For example, the $5 you spend on a latte today may not seem like much, but $780 over 12 months is. When you look at purchases this way, you might reconsider if the lattes are worth it.

More than just lattes

The Latte Factor is about more than just coffee. It’s about identifying wants versus needs and pinpointing how much you’re really spending on small things. Here are some other things you may be spending more on than you realize:
Dining Out
Dining out or getting takeout is often one of those “optional” expenses people overspend on that’s usually not budgeted for. Cooking dinner at home and preparing your own lunches are less expensive and often healthier options, especially if you meal-plan for the week.

Movie Streaming Services
With so many streaming services on the market, it’s easy to subscribe to more than you need and end up paying more than you intended. Pick a few services and cancel the rest. You can always temporarily resubscribe if you don’t want to miss a favorite show’s new season. Or try the free version. You may have to watch commercials, but you'll still get access to a variety of entertainment without the cost.

Gym Memberships
A gym membership is great if you use it regularly. If you’re only going a few days a month, you likely aren’t getting your money’s worth. Either recommit to using the membership more often or cancel it and find less expensive ways to stay fit, such as a free app or taking a walk.

Music Streaming Services
The various music streaming services available are mostly similar, yet many people subscribe to more than one. Pick one and stick with it. Or, skip the paid services and opt for the free version, redirecting those funds towards something more important.

The Latest Smartphone
Cell phone companies know people love having the latest smartphone and they will alert you when you’re eligible for an upgrade. Do you need a new phone? The features of a phone that’s only two or three years old will likely serve your needs fine. Save the upgrade for when your phone stops working.

Gasoline is expensive and ride-share fares are increasing. Of course, you still need to get from here to there so look for ways to make the trip less costly. Explore carpooling to work, consider public transportation, and whenever possible, walk or ride a bicycle (which also counts as exercise in place of the gym membership you weren’t using).

Experiences, Not Things
When considering whether to spend on something that’s a want rather than a need, think about what the experience means to you. Dinner with your spouse at a nice restaurant will likely be more meaningful than picking up an I-didn’t-feel-like-cooking dinner at a fast food joint. And a latte with a friend you haven’t seen in a while is probably more valuable than just grabbing one on the way to work.

Careful spending decisions aren’t the same as giving up something cold turkey. In fact, denying yourself the occasional luxury can sometimes lead to excess spending all at once because you’ve gone without for so long. Splurging on occasion is perfectly fine, especially if you’ve planned ahead for it. Consider the reasons behind your decision and make splurging something special rather than a habit.

What to do with your new savings

Remember that $780 you saved by not buying three lattes a week. There are many ways you can use that money:

  • Save it for vacation: A trip to Disneyland for a family of four can easily set you back $500, and that’s just to get into the park. Would you give up lattes for a year to give that experience to your kids?
  • Create an emergency fund: Many people don’t have emergency savings in case they lose their job or an unexpected expense comes their way. An extra $780 can be a big help if you suddenly need money.
  • Max your 401(k): Some people simply can’t afford to make the maximum contribution allowed in the 401(k) plan offered by their employers. With your latte savings, you can increase your contribution and make the most of the compound interest it accrues. If your job doesn’t offer a 401(k), you can still invest in your future by contributing your extra cash to an individual retirement account (IRA).
  • Pay down debt: Using latte money to pay off credit cards not only reduces how much you owe, but also diminishes how much interest you’re charged.
  • Pay extra principal on your mortgage: Although $780 likely won’t cover most Bay Area mortgage payments, it could reduce the number of payments you'll make over the life of the loan if you apply those funds as an extra principal payment each month.
  • Add to your child’s college fund: Many parents struggle to find money to save for college. Putting away $780 a year likely won’t cover tuition for four years, but it can provide a nice little dent as you figure out how to pay the rest.
These ideas only cover your skipped lattes. When you start saving on other wants-versus-needs expenses, the money can really add up, potentially to thousands of dollars each year. With these small sacrifices, your financial goals become easier to reach.

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