There’s nothing like bringing up “the latte factor” to a group of personal finance junkies to get a heated debate going. There are those who swear by it, who believe that making a small change, like skipping the daily latte, can make a big change in your finances. Then there are those who scoff at it, arguing that the little changes don’t matter if you continue to waste money on the big ticket items like cars and houses.
So who’s right? Well, both sides have valid arguments, but I tend to agree with those who who swear by it. Little things like lattes make a difference.
The opposition is right though, cutting out your daily latte isn’t going to make one lick of difference if you then go out and buy a $40k car or a $600k house. You have to focus on the big ticket items where there’s an opportunity to save or blow thousands of dollars with one purchase. If you don’t do this, you’re pretty much guaranteed to be saddled with debt for decades.
But who says it’s one thing or the other? Why can’t we focus on the big ticket items and the daily latte?
One thing that infuriates me about the opposition to the latte factor is that they get so hung up on the name. I’ve done the same so far in this post, but just so I could have a dramatic reveal in this paragraph! When you hear people talk about the latte factor, all they talk about are lattes. But the latte factor is about so much more than lattes. Consider another popular phenomenon: the butterfly effect. The premise is that a butterfly flapping its wings can affect weather patterns on the opposite side of the world. And yet people are perfectly capable of understanding that the effect was named for the basic premise, but it can be applied to many situations. People have no problem understanding that when you refer to the butterfly effect, you’re simply referring to a small action that effects a huge reaction. Entire movies have been made based on this premise.
So why do we have such a hard time applying the latte factor to situations beyond its basic premise? The latte factor isn’t about lattes, people! Lattes are merely a classic example of how a small purchase, made frequently, can have a big impact on your finances. The latte factor is in play every single time you look at an item and think, “it doesn’t cost very much, so it’s not going to have an impact on my finances.”
Making one small change may not have a profound effect, but making many small changes will completely alter your finances. Here are several examples of small purchases I used to make frequently:
- Daily lunch, $5-$15
- Monthly shoe purchase from Shoedazzle, $30
- Music and app downloads, $1-$10
- Dinners out 2-3 times per week, $15-$25
- Boxed hair dye once per month, $6
Sure, cutting out just one of those regular purchases wouldn’t make a huge dent, especially if it’s the $6/month hair dye, but cutting out (or drastically reducing) all of them provides a monthly savings of $500 or so. That’s $6000 per year! It’s a huge sum of money when you add it all up.
But there’s yet another reason why making these small changes is so important: they will alter the way you approach spending money so when that big ticket item comes along, you’ll be in a different mindset. If you go through life spending a couple dollars here, a couple dollars there every day, assuming that when you need to buy a car or a house you’ll save a lot of money then, you’re not going to be prepared to be frugal when that time comes! With the mindset of, “a little bit of money won’t make a difference,” you’ll be more likely to overspend on the big purchases. A few extra features on your car won’t seem like a big deal because it’s not that much money compared to what you’re already spending on the car. You’ll think, “I’m already spending $20k on the car, an extra thousand dollars for a rear spoiler isn’t going to make a difference.” It will. How do you think you’re going to have the discipline to be frugal on the big purchases if you don’t practice frugality every day?
So remember not to get too hung up on the name. The latte factor isn’t about lattes. It’s about all those mindless purchases you make on a day-to-day basis that you think are too small to matter. I’m here to tell you they do matter. Focusing on big ticket items is important, as is reducing spending on high-cost frequent purchases such as rent, cable, cell phone service, and gym memberships. But the little purchases are important too, as they can silently add up to huge sums of money over time. Focus on reducing spending on the little things and you’ll find more money in your bank account and be in a better mindset to approach the larger purchases.