The Latte Factor

Benjamin Franklin once said, “A penny saved is a penny earned.” This saying is true when considering the “latte factor” strategy of saving money. David Bach, a seven-time New York Times best-selling author coined the term “latte factor”, and it became widely used after being discussed in Bach’s book Finish Rich.

The “latte factor” teaches people how to save hundreds or even thousands of dollars a year by making small changes in their daily spending habits. Just a quick analysis will show that if you buy a $4 cup of coffee everyday, you are spending $28 a week or $1,456 per year. Imagine coupling that everyday with a $10 lunch at work, and you are wasting $2,500/year, assuming 50 weeks out of the year. Combined, that is almost $4,000 you could have in your bank account right now, and that’s not even counting interest payments from your bank or returns from an investment portfolio.

Investing Your Savings

30-Year Investment of SavingsWith a safe investment option like a bond yielding 5%, your $4,000 becomes $6,516 after 10 years, excluding inflation and taxes. Now assume you let your money sit in that investment for 30 years until you retire, that one year’s worth of savings has now become $17,288, and that’s without you lifting a finger other than investing it.

Lastly, let’s assume you continue to save $4,000 a year on coffee and lunch expenses for 10 and 30 years, and reinvest those savings every year into that bond. At the end of 10 years, by kicking your addiction to Starbucks coffee and eating out at work, you will have nearly $60,000, while the investor who saved for 30 years and reinvested $4,000 each year will have close to $300,000. And we wonder how the rich get richer, huh?

Start Saving and Investing Now

During these past four years, almost every household across the United States has been learning how to budget and cut spending. Though small daily expenditures of $3 to $5 here and there don’t seem like a big deal, in hindsight, the “latte factor” calculations allow us to see how much we spend every year on unnecessary purchases. Small lifestyle changes will help you save a lot of money every year.

But as everyone knows and has experienced at some point in their life, cutting a habit that has formed over the years right away or all at once isn’t easy. Instead of totally stopping your coffee habit, you can opt to buy it from Starbucks once or twice a week and make it from home the rest of the days. Then think about bringing leftovers to work for lunch once in awhile. Nonetheless, be realistic – we aren’t saying you should stop your caffeine intake altogether or stop enjoying your favorite restaurants, just save where you reasonably can.

Just remember, it’s okay to treat yourself once in awhile; either that or work really hard and make a ton of money so you can treat yourself everyday. And, don’t be penny wise and dollar foolish – meaning you save on a cup of coffee or cheap out on a birthday gift, then spend money on a luxury car you can’t afford while living in a rental apartment. The “latte factor” works even better when applied to big ticket items, like expensive cars, vacations, public versus private school, anniversary or Christmas gifts, shopping sprees, etc.

The “Latte Factor” Applied To You

But what if you’ve already taken steps to eating out less and making your own coffee and still need some areas where you could save?

To all the ladies who love going to regular manicures and pedicures, try going once a month instead of every two weeks and you could easily save yourself about $600, on average. Giving yourself a mani/pedi at home could help you save even more.

Going to the hair salon is another splurge most tend to overlook. Those of you who love to get their hair colored know how expensive it can be overtime. Each hair coloring runs about $70-$100, and though it doesn’t seem like a lot since you go every few months, you could easily save $500-$600 a year by coloring your hair at home. (Tip: For those who don’t feel confident enough to color their own hair, you can become a hair model for students attending cosmetology school and learning coloring techniques. You’ll be able to get a wonderful color for a very reasonable price, sometimes even for free.)

Along with getting your nails and hair done, it’s a given that one must always dress properly and look her best. To all the fashionistas who always have to look amazing, rather than shopping at high-end designer stores, check out discount retailers such as TJ Maxx, Ross, Marshall’s, or Zara. You’ll find fabulous clothing, shoes, and save hundreds of dollars.

The same concept applies to men. Cutting back on a beer or two after work, hitting the driving range once a month instead of every weekend, getting fast food twice a week instead of on a regular basis, and holding off on buying the latest technology and gadgets every time a company debuts a new product can help you save more money and feel richer.

Frivolous Expenses

Cable TV. Many families have cable subscriptions with a number of premiums such as HBO, Showtime, Starz, Cinemax, and dozens of sports channels. All this adds up to about $150/month or $1,800/year and you may not even watch enough to make up for that cost (not that you should watch that much TV anyway).

There are two options which could help you cut costs for cable subscriptions: 1) cancel your subscription and watch shows and movies online via Hulu, Netflix, or directly from network websites, or 2) if you don’t wish to cancel your subscription, call your cable provider and ask for customer loyalty benefits such as withdrawing the monthly rental cost for the cable box. This could easily help you save $150 a year.

Music. Additionally, everyone loves listening to music, and many people can’t go a day without it. But many pay subscription fees for satellite radio, such as Sirius or XM, or pay per song to download. You could easily save $200/year by stopping your satellite radio subscription and instead listening to free online radio stations, such as Pandora, Spotify, or Tunein Radio, via your smartphone hooked to your car stereo.

Gym Memberships. Many people buy gym memberships to fulfill their resolutions. Unfortunately, most never end up going past the first week or month, and in turn, are throwing away about $30 to $40 a month. Getting rid of memberships or products you don’t need or use would probably save every American family thousands of dollars.

Cigarettes. Another major expense is the purchase of cigarettes for smokers. At about $5 a pack in California or $10 a pack in New York, assuming one smokes a pack a week, you are spending a minimum of $260 or $520 a year, respectively. One pack a day smokers spend $1,825 or $3,650 per year, respectively. But don’t forget the other costs associated with smoking, such as lighters, gum and mints, not to mention the higher fees charged by insurance companies.

It shouldn’t come as a surprise that health and life insurance companies charge significantly more for smokers. By stopping your smoking habit, you not only save hundreds of dollars a year while young or tens of thousands a year in medical bills during retirement, but maybe even your life.

Save Money

The aforementioned are just a few daily spending changes one can make to help save them money. To find out your personal “latte factor”, think about frivolous purchases you make on a regular basis and try to stay on track with your saving and spending. Note, it is okay to splurge once in a while, but your main goal should be discipline when trying to save more than you spend. Don’t end up being penny wise, dollar foolish.