The Latte Factor is a phrase coined and trademarked by ersonal finance author David Bach to explain how the expenditure of many small things add up to a lot of money over time. The phrase itself derives from the fact that Bach showed that a latte a day at $3.50 equals $1,260.00 over a year. In essence, The Latte Factor shows us how much money we can waste and why we never get ahead financially.
However, whenever I think of the Latte Factor (assume the registered trademark sign is behind this phrase since this luddite can’t find it on WordPress), I think of the episode of the tv show Friends. Specifically, I think of the episode where Rachel’s boss kept going out for a smoke and all her co-workers except her joined her boss, giving Rachel the impression that her smoking workers were getting ahead of her with all the extra (albeit smoky and poisonous) face time.
The point being there are two large limitations to the Latte Factor. The first was recently commented on by Kathryn from Million Dollar Journey that overly focusing on cutting out all expenses would deprive a lot of little pleasures of life. The second is, as Rachel found out, that spending a little for a purpose can go a long way.
To use the sports analogy, our personal finance basically compromises of offense (generating income or human capital) and defense (saving money). Some can succeed on all offense. Some can succeed on all defense. But it is hard to maintain the discipline to do both (and kudos to those of you who do). One tends to get ahead using a bit of both.
Businesses succeed by their ability to market and sell effectively. Why should you be any different? A $3.50 latte with a colleague who may give you a job lead or vital market intelligence, with your boss to get to know each other better, with a mentor to teach you about investing is worth infinitely more than the immediate loss of $3.50. Some of the best advice I got was over a coffee and building a book of business is sometimes done one coffee and affordable lunch at a time.
If you are gainfully employed and do not think you have to market yourself, think again. What is sometimes referred to pejoratively as a co-worker playing office politics is actually a person marketing themselves. Whether this is perceived as right or wrong is in the eye of the beholder but all relationships are based on shared experiences and your boss and co-workers may think well of you sharing those $3.50 latte experiences. It is a tough job market out there so hanging onto your job through networking may be worth those small expenses.
As a magazine wrote recently, employees who worked from home were more likely to be let go not because they were more or less productive but because the boss did not see them as much and out of sight is out of mind. A $3.50 latte to save your job or to find a new one has a real revenue recognition quality about it.
The point is not to spend money but to spend it for a purpose. Bach is right in the sense that small things do add up but I would modify this general statement with spending on small things without a purpose is wasteful. However, spending on things that will advance your career, your business and your life, as long as it is reasonable and for a clear purpose, can be worthwhile expenses.
February 3rd, 2010 at 11:27 am
That cup of coffee really can pay dividends. The idea of marketing yourself made me think of a recent post on Darwin’s Finance where he asked whether it was easier for extroverts to get ahead because they are more outgoing than introverts. An introvert might be perfectly willing to spend on the coffee, but unable to commit to the social investment it would necessitate.
February 3rd, 2010 at 6:17 pm
I don’t think the point of the “Latte Factor” is to never spend an extra penny on things like coffee. Go with the boss for a cup of joe once in a while if you think it will help your career. If you are going to Starbucks twice a day and spending $5 bucks a pop or buying your lunch 5 days a week at $8 a day, but can’t find $100 bucks a month to put in your kids RESP, you might consider giving up the lattes and lunches, except for “special” occasions like sucking up to the boss or co-worker birthdays etc.
February 3rd, 2010 at 11:17 pm
I first heard of the latte factor live from David Bach.
He pointed out that we can easily ignore small expenses without realizing they add up to big dollars that we’d be wise to invest. He gave the example of a coffee on the way to work, a mid-morning snack and eating out at lunch. The expenses add up. Instead, we could make coffee at home (even a gourmet brand), bring fruit for the snack and bring our own healthy lunch. Savings without deprivation.
The occasional latte, cappuccino or hot chocolate is fine. From a business perspective “meeting over coffee” is cheaper than having lunch.
February 4th, 2010 at 1:56 pm
I think another area where the latte factor fails is when he gives what the money would grow to if invest it at 5% or 7%…when we all know that you don’t get those rates unless you have thousands of dollars to invest NOT the few hundreds you may save from curbing your spending.
I have a sort of latte factor fund in my savings where I put a tiny amount of money every month but if I want to get something frivolous as long as that account has a balance then I do not worry about it.
February 4th, 2010 at 10:25 pm
[...] Thicken My Wallet explains why the Latte Factor doesn’t work. [...]
February 5th, 2010 at 12:27 pm
I actually tried that once. For one month I was making my own coffee in the morning, I was bringing my own lunch to work and I reduced smoking. I saved about 150 euros that month. It’s a shame when people say that they don’t have enough money for their children but they always find money for pack of smokes or other things that are not so necessary!
February 5th, 2010 at 1:52 pm
so if you’re drinking coffee with friends its ok… if you’re drinking it alone then it’s not ok?
so the money that you’d save by not having the latte goes into the bank or investment vehicle and then what? you either spend it later or you die with it in the bank.
when you spend it later i guess the assumption is that the money has now grown and not only can you have a latte but you can have a cookie too!
personally i’d rather had steady consumption now, rather and over consumption in the future.
February 12th, 2010 at 8:39 am
This is a very interesting factor which kind of annoys me and is helpful. Myself being a non-smoker, I cut down my co-workers smoke breaks like no other. Only after you have worked your ass off, can you go and relax outside for a smoke; albeit while everyone else continues to work.
I am very frugal and do not spend on things that are a waste. Now keeping that in mind, sharing a coffee in a business perspective can be very beneficial. I also dont go out to bars to drink, I prefer to drink at home.
But using 1 example from 2 days ago:
A friend was in town for a few days, and I only had a few hours to see him. I said lets go get a few beers and catch up on all times. This is against what I usually do but I did it to be able to openly share with this old friend, and be more comfortable.
We ended up talking for almost 2 hours about my new business and his business and it was very worthwhile! worth the $15? Definitely.
In conclusion, if you can make the ‘latte factor’ worthwhile, than it is a worthy investment in its own. If its not worthwhile, stick that money: ($4/day, $20/week, $75/month) into a mutual fund and watch it grow long-term. (and yes for more than a 5% gain)