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The Latte Factor – Yes, it’s a Big Deal

Latte FactorThere’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.

16 Responses to The Latte Factor – Yes, it’s a Big Deal

  1. I love this post. I think the Latte factor is valid and many forget about the small purchases (my wife included). The small purchases can really do some serious damage because you don’t give them as much weight in your financial decisions. What is $5 here and $5 there. Well, it can be a lot once added together.

    • Gen Y Finance Journey

      Thanks, Grayson. I’m surprised at how many pf bloggers shrug it off. It’s not just about the little bits of money that add up over time, it’s about making frugality a habit so it will bleed into other areas of your life too. If you get to the point where you’ve amassed enough money that you truly don’t need to think about these small purchases, that’s great for you. But most people would benefit greatly from reducing the small recurring expenses, so I don’t think anyone should knock it!

  2. I knew that the latte factor was a phrase that included all the small spending we do each day without even thinking about it. And it is true, it adds up so fast.

    When I worked in a corporate job I did all of the stuff you mentioned above plus paid $100 a week for parking at the office. Never gave it a second thought. While I did whine about the parking cost, but not the breakfasts and lunches.
    As well I use to spend $150 three times a year on my hair. Now I am happy to spend $7 every 4 months to dye my own hair.

    • Gen Y Finance Journey

      I find that most of the people who shrug off the latte factor are the ones who have amassed a small fortune for themselves and often have the view that anyone, through hard work, can become a high income earner, and should therefore not have to care about lattes. I’m of a different mind – we all have the potential to increase our income, but most of us are never going to earn hundreds of thousands of dollars each year regardless of how hard we work, so the little things matter.

      I used to spend exorbitant amounts on my hair at pricey salons, but I wouldn’t categorize them as “small” purchases. :) I got my last haircut at a beauty school for $12 and it was just as good!

  3. Yes, I agree, it is an entire way of dealing with money and spending, not either small things or big things.

    • Gen Y Finance Journey

      If you want to improve your finances, you have to focus on all types of spending – the day-to-day stuff and the occasional big ticket item.

  4. Focus on the small things and the big ones will follow. The latte factor shows that perfectly.
    Although being penny wise and pound foolish is a bad idea too.

    • Gen Y Finance Journey

      Exactly. The small things are a good starting point. You likely encounter small things for a while before your first big purchase comes along, so you’ve got to practice flexing your frugal muscle!

  5. Very shrewd point. The key is always balance and restraint really. My wife and I try to ensure that we have an active social life without breaking the budget. If there is something we want to do, such as treat ourselves to a meal out, we make sure to cut back on something else.

    Personally, I’ve always grown up to see eating and drinking out (including work lunches) as a treat, more than part of my everyday life.

    • Gen Y Finance Journey

      I think that’s how it should be. If there’s something you’re spending money on every day, you really need to critically look at that purchase and decide if it’s really worth it to you.

  6. The best thing to do is to track ALL your spending each month and then look at the trend month-over-month and the yearly total. If it’s some obscene amount that you would rather have applied to savings, retirement, etc. then you should probably reconsider your purchasing behavior. If it’s not a material value, then you should continue to enjoy your latte…or whatever else it is you are evaluating ;)

    • Gen Y Finance Journey

      This is true, though you can’t ignore EVERY category of immaterial value, because if you add them together, they could become much more significant. If there are one or two areas where you spend a really small amount of money that are important to you, it’s fine to keep them, but when there are several, you need to cut back somewhere.

  7. Great post! As has been said, it’s the overall way you view and handle money. By keeping smaller purchases in check, the big ones will become easier to discern how you should spend. That’s where the growth moves to the next level. Add that financial decision making to earning more and you have a very powerful combination.

    • Gen Y Finance Journey

      Great points. If you do just one of them, you’ll see some results, but it’s when you keep the small purchases in check, are frugal with the big ones, AND increase your income that you start making fast progress.

  8. It’s funny that I am reading this post cuz I just forgot to get my morning latte today. Now you make me think twice! I am so guilty of frivolous purchases it’s not even funny. Thanks for this post.

    • Gen Y Finance Journey

      We’re all guilty of slipping up on this one sometimes, so we need frequent reminders! Just don’t deprive yourself too much. The occasional latte is ok, but if you can make your own coffee at home or get it for free at work the majority of days, that’s best.

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