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The 'latte factor' is not about the latte

The 'latte factor,' popularized by David Bach, is not really about making small sacrifices. Its power is far more profound.

By Dough Roller Mar 18, 2014 1:25PM

This post comes from Rob Berger at partner site the Dough Roller.

The Dough Roller on MSN MoneyI've been reading a lot of criticisms of the latte factor recently. If you're not familiar, the Latte Factor was popularized by author David Bach.  The idea is simple.   If instead of getting a $4 latte every day, you instead invested the money, you'd have a pile of cash in 10, 20, 30 or 40 years.

Lately the latte factor has come under a lot of criticism. Some argue that we shouldn't deprive ourselves of the small pleasures in life.  We are on this earth for a relatively short time, and if you enjoy a daily latte, you shouldn't sacrifice that enjoyment for a retirement several decades away.
Coffee Woman © Bloomimage, CorbisIt's a valid point.  But the debate misses the real point -- the latte factor is not about the latte.

It's not the latte
On the surface, the latte factor is about the countless small expenses that we give little thought to each month.  We spend money out of habit, for convenience, or for emotional reasons.  Regardless, the latte factor is there to remind us that the small expenses matter.

Saving small amounts of money over a long period of time can have a huge impact on your finances. As a rough calculation, multiple your "latte" weekly expense by 752.  The result is how much you would have if you instead invested this money for 10 years.  (I first heard about the Rule of 752 in my interview of Mr. Money Mustache.)

Go beneath the surface, however, and you'll find that the latte factor is about a lot more than just math.  The real key with the latte factor is this--most of the daily small ways we spend money do not add to our enjoyment of life.  We've convinced ourselves that they do.  But in reality, they add very little. Sometimes we spend money out of habit.  You go to Starbucks because that's what you do in the morning.  What if one day you didn't?  What if you skipped Starbucks for a month?  Would you really miss it?  Have you ever tried? 

The latte factor is not about sacrificing the enjoyment of a daily latte.  (I'm in a Starbucks enjoying a Mocha as I write this.) It's about understanding what we truly value.  If we focus on spending money in ways that enhance our lives, we'll have plenty of money to enjoy our true "lattes," whatever they are.  I found this to be true after I gave up cable and a country club membership (some "lattes" are more expensive than others).

Let's roll
Your "latte" may be something totally different than what it is for me and for my family. But I've found that when we really think about the way we're spending small amounts of money, we find that we spend money in ways that don't really add meaningfully to our lives.

If you can think intentionally about how you're spending money, you'll find ways to cut back that do not affect your life in any meaningful way and that over the long term can have a big impact on your finances. To me that's really what's at the heart of the latte factor.

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