Small Business

What Is The Latte Factor

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 16 minute read

When I have a few hours to spare, I enjoy taking a trip to the neighborhood coffee shop and rewarding myself with a cafe mocha. I know I’m not the only one. There are millions of cups of coffee eaten annually in the United States, but Helaine Olen of Slate estimates that 4 million of those are gourmet coffees from Starbucks.

Indulging in this small indulgence, though, is a surefire way to ruin my financial future, at least according to financial guru David Bach. Bach says the way to get rich is to stop spending money on frivolous things like lattes every day and instead put that money toward savings or investments. He calls this insidious drain on our finances “the latte factor” because of all the little things that add up.

This assertion has been utilized by Bach in almost a dozen best-selling books on personal finance, as well as in many seminars, speeches, and TV appearances. However, some economists and analysts say the latte factor has a major flaw: it doesn’t work. They claim that saving a few dollars here and there won’t make you rich, and that if you focus on doing that, you’ll forget about the significant changes that will.

The Argument for the Latte Factor

Bach defends the latte factor by saying: Make investment a habit; that’s the key to financial security. Dedicating a little portion of each salary to savings or investments and watching those funds grow over the course of four decades will allow you to retire comfortably.

Paycheck to paycheck life makes it challenging to put away any money at all, much alone a tiny sum for investment purposes. Bach suggests cutting back on frivolous spending like buying an expensive coffee drink every day as a means to achieve this goal. In an interview with CNBC, Bach explains that if one were to invest the $5 per day normally spent on coffee and had a return of 10%, they would have about $950,000 after 40 years.

Bach emphasizes that the idea is not limited to coffee purchases; it can be applied to any inconsequential outlay of cash. Suppose you spend $50 per week on lunch out, $6 per day on smokes, and $50 per month on cable TV. There is now a latte factor calculator available on Bach’s site so you can see how much your own vice is costing you.

In the realm of finance, the latte factor has been enthusiastically adopted by a number of experts. Some of these are:

  • In an interview with CNBC, financial expert Suze Orman referred to regular Starbucks purchases as “peeing $1 million down the toilet.”
  • “Overspending is the fundamental reason why individuals fall from a position of financial stability into a paycheck-to-paycheck existence,” writes Jean Chatzky in “The Difference: How Anyone Can Prosper in Even The Toughest Times.”
  • According to Australian real estate entrepreneur Tim Gurner, who was interviewed on 60 Minutes, millennials can’t afford to purchase homes because they waste their money on things like “smashed avocado for $19 and four coffees at $4 apiece.”

Simply put, the latte factor has given economists a simple, memorable method to explain why so many individuals are having trouble making ends meet in the modern economy. Conveniently, it places blame on people rather than corporations or governments for economic problems.

With Bach’s formula, it seems like an easy problem to solve. There’s no need to address fundamental issues like stagnating earnings, increasing property prices, or growing student debt; just reduce a few frivolous expenses, and your money woes will disappear.

The Challenges of the Latte Factor

Bach has made a good point in theory. Actually, little, consistent outlays may mount up over time, just as tiny, consistent investments do. Theoretically, moving funds from one to the other may prove to be a fruitful means of accumulating wealth.

However, some financial gurus, including Olen and Ramit Sethi of I Will Teach You to be Rich, argue that this strategy is unrealistic. First of all, Bach’s arithmetic isn’t exactly crystal clear. It assumes a rosy image of how poor people in the United States actually spend their money.

The Mathematical Problem

Olen explains the flaws in Bach’s mathematics in a Slate piece. She claims that in his haste to provide a seemingly impressive sum for how much your daily coffee costs, he omitted key components.

  • Latte Price Per Unit. It was in his 1999 book “Smart Women Finish Rich” that Bach first mentioned the latte effect, assuming that the average woman spends $5 per day at Starbucks. But in 1999, the maximum you’d pay for a latte was $2.50. Bach inflated his estimate by $1 a day for drinks and nutrition bars and by $1.50 for cookies.
  • Price Annually. Using this exaggerated $5/day number, Bach determined that his patient would spend “nearly $2,000 a year” on coffee and food. Although $5 a day multiplied by a year comes to $1,825, the total is not $2,000. For the second time, Bach inflated a number by rounding it up to make it seem greater.
  • Making a Decision About Investments. Bach took it for granted that his interviewee would put all $2,000 of her money into the stock market. The way you’ve divided up your assets is fraught with danger. The “rule of 110” states that you should invest around 110 minus your age in equities. No one would start investing solely in equities at age 22 and maintain doing it for the next 40 years.
  • Profitability; ROI; Rate of Return. Following this, Bach asserted that an investment in stocks alone would provide 11% annualized returns. The period from 1949 to 1999, during which he claimed this growth rate to have been typical, was really a time of exceptional stock market performance. From 1926 until 2020, the stock market has really returned around 10% a year, on average.
  • Taxes and price increases. Neither inflation nor taxes were included in Bach’s calculations. The AARP’s retirement calculator estimates that after 40 years, an annual investment of $2,000 will yield a return of less than 3% once inflation is taken into account. Even with a tax-deferred plan like a 401(k) or an Individual Retirement Account (IRA), you will eventually have to pay taxes on your retirement savings.

Fixing these issues makes the latte factor’s ROI look less impressive. Let’s pretend for a second that your daily job only costs $3 instead of $5. You put it in a balanced stock and bond portfolio, anticipating an annual return of 8.7 percent.

After 40 years of saving and applying a tax rate of 15%, you will have around $142,000. Your initial investment of $50,000 would be worth around $43,500 after 20 years if inflation averages 3% every year. That’s hardly near the $950,000 that Bach pledged, and it definitely isn’t worth 40 years of sleep deprivation.

The Financial Issue

It’s quite unlikely that you’ll be able to achieve financial freedom by forgoing a $3 daily cappuccino. The latte factor, however, has a more fundamental flaw: it presupposes that you already have $3 per day to set aside for savings. According to Bach, most people are unable to make progress toward their financial goals because of trivial expenditures. Nonetheless, many economic experts believe that the major factors are what truly matter.

Amelia Warren Tyagi and her mother, United States Senator Elizabeth Warren, are two such economists. The Two-Income Trap: Why Middle-Class Parents are Broke was released in 2007. It was, Senator Warren told The Harvard Gazette, “a narrative about too many trips to the mall, too many $200 sneakers, too many Gameboys” when they first started looking into it.

However, the scientists found that family spending on these extras has decreased significantly over the years. The percentage of a family’s income spent on items like clothing, processed meals, furnishings, and electronics is far lower than it was in the 1970s. 

Simultaneously, major fixed costs, or the things a family can’t easily cut back on, have increased dramatically.

Seventy-five percent of a typical family’s discretionary spending in the early 2000s went toward just three major outlays: housing, healthcare, and education. In 1973, these three categories accounted for less than half of a typical family’s disposable income. In an interview, Warren stated, “People aren’t going broke over sneakers. Mortgages are driving people to bankruptcy.

Americans in need already knew that. Tim Gurner’s condescending comments about avocado toast were met with snarky tweets from today’s youth, who complained bitterly about how they’d spent all their money on rent and transit instead.

The millennial age is generally prudent with their finances, according to other studies. Gen Y saves a larger portion of their income, uses credit cards less frequently, and spends less on non-essentials like clothing, going out, and booze than prior generations.

To sum up, millennials’ reluctance to buy homes is not due to frivolous spending. Wages are down and home prices are up compared to prior generations. It would take millennials an astonishing 113 years to save enough for a down payment on the typical American house, according to an estimate by CNBC, even if they reduced their spending on dining out to the level of baby boomers.

What Actually Works

The outcry about “frivolous” expenditure, it would appear, is unwarranted everywhere. In fact, for low-income families, every penny matters, thus minimizing wasteful spending is always welcome. For the typical American, though, it won’t be enough to prevent bankruptcy or help them retire comfortably.

So, if foregoing your morning coffee doesn’t result in financial success, what does?
Maintaining a focus on the larger picture.

This necessitates analyzing not only “extraneous” but also “essential” costs. Spending and earning less implies more money for savings and investment. More specifically, it entails making wise financial decisions that will lead to a healthy and consistent rate of return on your investment capital.

Reduce Your Fixed Expenses

Large, consistent costs tend to throw off a budget more than their smaller counterparts. As a result, prioritizing these major costs makes the most sense if you’re looking to save more money. Common examples of these are:


First, you need to weigh the pros and cons of both renting and owning a property. If you are on the fence about purchasing, renting is a safer choice. When you buy a home before you’re ready, you’re locked into a long-term commitment with a fixed monthly payment.

If you decide to rent instead of buying, try not to spend more than one-third of your income on rent. According to Statista, the average monthly rent in the United States was $1,124 in February 2021. If that’s too much money, maybe hunt for a property in a cheaper area, or maybe get a roommate.

If you’re going to buy a property, be sure it’s something you can comfortably afford. If you’re looking to reduce your monthly mortgage payment and your interest rate, downsizing to a smaller home may be an option to explore. Alternatively, you may employ house hacking techniques, such as renting out extra space, to cover your mortgage in full.

Health Care

According to a 2017 study by the JPMorgan Chase Institute, out-of-pocket health care expenses for the typical household were just 1.6% of income. The proportion wasn’t the same for everyone, though. It was different depending on age, wealth, location, and, most importantly, health.

According to the data presented, only 10% of individuals are responsible for around 50% of all healthcare expenditures made by individuals. These unfortunate households allocated nine percent of their disposable income to medical expenses. In addition, the same families frequently ranked among the top spenders year after year. In 2016, over half of the highest-spending households on health care from 2015 were again among the highest-spending families in 2016.

Maintaining manageable health care expenditures is a top priority for many people, making health insurance a must-have. The premiums may be pricey, but they pale in comparison to the thousands of dollars you can spend on a health crisis if you don’t have coverage. 

Additionally, the Affordable Care Act (often known as Obamacare) provides financial assistance to those with low incomes.

Preventative care is the second most effective strategy to save costs associated with medical treatment. Visit your doctor and dentist regularly so they can catch any issues early on before they balloon into major health crises. You won’t just save money, but also time, energy, and discomfort.


Much of a family’s income goes toward necessities like housing, healthcare, and education. Prior to enrolling in college is the optimal time to start putting money down for this purpose. Now, you may choose from a variety of strategies that will help you keep costs low and reduce your student loan debt to a minimum. Some of them are:

  • Reducing the number of credits you need to finish high school by enrolling in advanced classes
  • Spending the first two years of your undergraduate education at a less expensive community university
  • Using any and all grants and scholarships that can be found
  • Investigating No-Cost University Options
  • Thinking about a job that doesn’t need a four-year degree

Now that you’ve graduated, you may be struggling to repay your student debts. Examine the possibility of refinancing your student loans if interest rates have decreased since you first took out the loans. Also, investigate options for canceling all or some of your student loans, such as repayment and forgiveness programs.


In 2019, Americans spent $10,742 on transportation, or nearly 13% of their income, according to a poll by the Bureau of Labor Statistics. For the most part, this was spent on automobile-related necessities. On average, families spent $4,394 on new cars, $2,094 on gasoline, and $3,474 on maintenance and other vehicle expenses.

Not having a car to maintain is one method to save money in this area. A car-free lifestyle may or may not be cost-effective, however, depending on your location. The savings from taking public transportation or walking more often might be nullified by the time and money spent on car rentals, taxis, or ridesharing.

Even if you really need a car for your daily life, you may reduce your automobile expenses. Instead of taking out a loan to finance a vehicle purchase, try saving up the money instead. 

Consider the figures to determine if going with a pre-owned vehicle is the best option financially. And put off swapping in your clunker for as long as you can.

Increase Your Earnings

How much money you spend is only half the picture when it comes to financial independence. Experts disagree on which factor is more crucial, but they can agree that money is a big deal. Sethi said in a CNBC interview, “There’s a limit to how much you can cut, but there is no limit to how much you can gain.”

Here are some suggestions from financial gurus like Sethi on how to boost your earnings:

Find the Ideal Job

Choosing a profession that provides a comfortable income is a big benefit. According to Tom Corley, who spent five years researching the habits of billionaires for his book Rich Habits, the “Saver-Investors road” is the most straightforward approach to amass wealth.

It requires putting aside a sizable portion of one’s salary, which is considerably simpler to accomplish when one is well off financially. The majority of Saver-Investors, according to Corley, make six figures.

Corley, however, argues that doing work you enjoy is equally as vital as doing work that pays well. For the most part, the wealthiest participants in Corley’s study took the “Dreamers” path, which involved actively pursuing a long-held goal or aspiration such as starting a business. They cared so deeply about what they did that they put in extra time, skipped vacations, and endured hardships for years to be where they are now.

You might not want to go to such lengths, but it’s been proven that those who like their work are more productive on the job. When deciding on a career path or starting a new one, it’s important to weigh not just the potential benefits but also the personal sacrifices involved.

Get a Raise

According to Sethi, your current employment is the best place to start looking for a raise. If you are currently being paid a salary, you should look at increasing that amount as a starting point.

Asking for a raise, however, is no guarantee of receiving one. A few suggestions that may be useful are as follows:

  • Get in line, but be timely about it. If your company has any extra cash on hand, now is the time to ask for a raise. Watch how the firm is doing financially and ask for something when times are good. Choose a moment when your employer is not too swamped. Appointments with the boss are best scheduled after lunch, when he or she is more likely to be in a pleasant mood rather than before.
  • Make sure you get your homework done. Take use of resources like Educate To Career and Glassdoor to learn about salaries for professionals in your field at other firms. LinkedIn groups allow you to get advice from peers in your field. Find out your worth and present it to your employer.
  • Please list your accomplishments. Create a resume that highlights the most significant contributions you’ve made to your company. Don’t forget to include any monetary gains or savings your efforts have resulted in for the company. Utilize these achievements as leverage in your negotiations with your superior.
  • Achieve a Win-Win Agreement. You may apply many of the same tactics you use to bargain for a better television set pricing to your salary negotiating efforts. Just say what it is you desire. Maintain composure and an air of self-assurance. Prepare your presentation in advance so that you can deliver it confidently and without hesitation.

Receive a Promotion

Earning a promotion is a better way to boost your compensation than just asking for a raise to keep doing the same work you’re already doing. Many multi-millionaires have found success with this method.

A third of millionaires, as discovered by Corley, become so through working their way up in a company. Stock options and partnership stakes in the company’s revenues were the primary sources of their fortune. If you want a promotion, consider these methods:

  • Understand your boss’ needs. Anticipate your supervisor’s demands and fulfill them without being asked. Instead of waiting for your yearly evaluation, ask your supervisor what you may be doing better, and then take action accordingly.
  • Be easy to collaborate with. Be kind and polite with all of your coworkers, not just those who determine your pay. As far as possible, you should avoid corporate rumors and avoid becoming engaged in workplace disagreements.
  • Continue to Learn. Invest time in acquiring new talents and refining existing ones. Focus on both job-specific and general abilities, such as communication and problem-solving, that can be used in any industry.
  • Take Extra Steps. Go above and beyond your job’s obligations to give additional services that benefit the organization. Be the individual that is willing to stay late, take on more projects, and assist coworkers.

Start a Side Business

Your primary occupation should be your first, but not last, money-making stop. Success stories like Grant Cardone’s and Ramit Sethi’s emphasize the need of diversifying one’s income. Sethi suggests forgoing entertainment options like television in favor of establishing a side business.

Don’t try to make a living by picking some sort of side business out of thin air. Cardone recommends establishing mutually beneficial relationships between your numerous sources of revenue. If you want to avoid having to start from scratch when starting your side business, it should make use of the same information and abilities you already utilize in your day job.

Create Passive Income Streams

Passive income may be used to complement your regular income from work or enterprises. Passive income does not refer to income earned with zero effort. This expression suggests that you will reap rewards for a very long period after putting in some initial work.

Profits from such endeavors as:

  • Bonds, annuities, dividend-paying stocks, real estate investment trusts (REITs), and peer-to-peer loans are examples of income investments.
  • Through Worthy, you may invest in someone else’s business and get a 5% return on your investment.
  • Airbnb allows you to rent out a rental property or a room in your house to a boarder.
  • Sales of creative works like books, films, and music.
  • Earnings from advertisements on a blog, website, or online videos

Make Smart Investments

When left in a savings account, even tens of thousands of dollars every year won’t be enough to make you wealthy. The meager interest rates now offered by such accounts mean that your savings won’t even keep up with inflation. Investment is the means through which one may increase his or her material riches.

Investing is a broad and intricate subject that goes far beyond the scope of this article. You can maximize the return on any investment by following a few simple guidelines, though.

  • Find a trustworthy guide. Find a reliable financial advisor to assist you if you lack the self-assurance to make sound investment decisions. SmartAsset provides a tool to help you locate an adviser if you don’t already know any. Another option is to use a fee-conscious robo-advisor like Betterment.
  • Integrate automatic investing into your routine. Despite his numerous errors, Bach did get one thing right: automating your investment strategy significantly increases the likelihood of a positive return. Most brokerages allow you to set up a monthly or quarterly automatic investing plan that invests a specific amount of money directly from your bank account. In this way, you may avoid making the common mistakes of forgetting to invest or putting it off. When share prices are low, the system automatically purchases more shares for you. In addition, you may utilize automated saving programs like Acorns to automatically increase your savings.
  • Diversify. Greater returns might be expected from more precarious investments. However, if you invest everything you have in them, you run the risk of losing everything. Therefore, diversification is highly recommended by financial gurus. Diversify your holdings so that the loss of a single investment won’t wipe you out financially.
  • Reducing Costs. Your investment returns will be reduced by the amount of fees you are required to pay. Index funds and exchange-traded funds (ETFs) are better than managed funds since they have substantially lower expenses.
  • Spend as little as possible on taxes. Return on investment is further reduced by taxes. While retirement funds like 401(k)s can’t totally avoid taxes, they can provide a tax-deferred environment in which your savings can grow over the long term. In addition, municipal bonds and other investments are often exempt from federal income tax.

Bottom Line

Cutting back on coffee isn’t the only requirement for financial freedom. You’ll need to consider your major outlays, income, and investment opportunities. It’s more effort than skipping your morning coffee, but it’s also more likely to lead you in the direction you want to go.

The good news is that you can keep up your regular intake of coffee, or any other modest indulgences, even while you put in all this effort. In fact, giving yourself these little rewards might help you avoid becoming burned out on being thrifty and give you the strength to adhere to your financial plan over the long haul.

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