$325 cups of coffee, or why the ‘latte factor’ matters
Posted
Oct 04 2007, 01:20 PM
by
Karen Datko
This post comes from partner blog Blueprint for Financial Prosperity.
The “latte factor” was a term coined by David Bach to represent the idea that the key to financial prosperity is to cut out the little things in life you're paying other people for, and spend that money on yourself and your future.
Mathematically, it involves taking a $5 cup of coffee each day, or other discretionary spending you'd like to substitute in its place, and calculating how much that $5 would be worth in 40 years if you had invested it.
It's not a particularly novel idea because everyone can appreciate that saving $5 each day and then compounding that at 11 percent each year for 40 years will result in a huge number. But its value is that it challenges you to examine the motivations behind your spending and how you could change those for the better.
It all adds up
When you make a large capital purchase, like a house, a car, or even a plasma television, you spend quite a bit of time researching in order to get the best deal. You do that because you can potentially save more because you're spending more. You're aware of the spending because of how much the single item is –-thousands of dollars, and because of how you'll be paying -- almost immediately. You will have less to spend on other things, even if you don't pay off the entire balance right away.
What does this have to do with a cup of coffee? It's a mere five bucks. Five bucks won't bust your budget, and five bucks will hardly register on the radar for those who drink it every single day. It's not a plasma television, it's not a car, and it's certainly not a house. It's a drink that will perk you up, make you feel awake in the morning, and, gosh darn it, you deserve it.
However, that $5 purchase is a capital purchase when you extrapolate it over 40 years.
That's quite a habit
If you compounded $5 over 40 years at 11 percent, that cup of coffee will cost you $325 minus taxes. Three hundred bucks for your cup of coffee. A $300-a-day coffee habit would probably qualify you for Coffeeaholics Anonymous. Even if you compounded it at 8 percent, that cup still costs you more than a hundred bucks.
See, you care about the plasma television purchase price because it's $1,000, and you don't care about the cup of coffee because it's a mere $5. But won't you in 40 years be wishing you hadn't had that cup of coffee?
I would think that you in 40 years deserve an extra $300 a day just for putting up with you for the last 40 years. Don't you? (Wrap your head around that little Philip K. *** mess of confusion.)
I think so.
