Every financial adviser has some version of the Latte Factor. It goes like this. If you skip your latte, you save about $4 every day. That’s about $1460 per year. Instead of your usual latte, if you invested that money at 11%, you will have a $1 million dollars in 40 years. There is even a Latte Factor calculator for that.
While the math adds up, and the scenario makes sense, is that how you would like to live your life? Skimping on a $4 cup of coffee every day in the hope that you will end up a million dollars in 40 years?
The key to building wealth is living within your means and investing your excess earnings. If you can make your savings automatic, and build good money habits, you will reach your financial goals.
Cutting Your Latte Is Not Worth It
Cutting little indulgences like a latte or an occasional lunch with a friend means that you will have no fun. People who do this usually end us binge spending elsewhere anyway. It’s not a sustainable lifestyle. After all, accumulating money is not your only goal in life.
Indulgences like a coffee or a latte can help you be more productive at work. It is also a great opportunity to network with colleagues at work.
Don’t overdo it
Don’t drink 2 lattes every day, eat out every day and bust your budget. Be reasonable, and set boundaries for your spending. Know where your money goes and limit unconscious spending.
Instead of skipping on your latte, what else could you do to reach your financial goals?
Live well within your means
Manage your money in such a way that you have money left over every month. Save and invest your excess money prudently. As your income increases, try to keep your expenses flat. I have friends who increase spending every year as their income grows. They buy flashy cars and big homes but they are never able to build wealth.
Automate investments
Set up automatic transfers from your bank account to your investment account. I set up automatic transfers on the 1st of the month when I get my paycheck, and build my budget around what’s left.
Increase your income
There are several things you could do to raise your income. Find a new job, ask your boss for a raise, get a side hustle or sign up for a weekend course that will improve your skills.
Cut subscriptions and services you don’t use
Periodically check if you subscribe to streaming services or magazine subscriptions you don’t use. Cutting them can save you money and you won’t even know the difference.
Shop Around To Save Money
At least once a year, shop around and see if you are getting the best deal for your home and car insurance, cable, internet, and other services. Put any savings you get into your investments.
Bottom Line
Skimping on minor indulgences is not a sustainable way to build wealth. The key to building wealth is saving and investing. Go ahead and have your latte. You will be fine.