Oh that evil, much maligned, Four Dollar Latte…
Author David Bach (The Automatic Millionaire) coined the term ‘Latte Factor’ over ten years ago. The point being made: small, habitual (shall we say, mindless) expenditures add up over time. This leads to a missed opportunity to save, invest and build wealth. I also make a similar argument in ‘Catch the Little Foxes’.
So, let’s pick on the 4-dollar latte. Say you stop at a local coffee shop to pick one up most weekday mornings. We will just focus on the financial cost and not the time you spend waiting in the store queue for said latte to be prepared.
That’s $4 a day, $20 a week, approximately $1,000 a year. What if you forgo your daily latte and, instead, invest $1,000 per year in mutual funds inside a Roth IRA? Let’s say, on average, you get a 7% annual return on the mutual fund. (David Bach originally used a 10 – 11% return in his calculation; however, in today’s environment, a 5 to 7% return is probably more realistic, IMO.) At 7% for 40 years, the lattes could be transformed into nearly $200,000! Note: this amount does not take into account inflation. However, proceeds from a Roth IRA may be tax free – a topic for a future post.
Here’s a chart displaying how your forgone daily latte will grow in time at various rates of return:
| Long Term Cost of the Daily Latte ($4/day, $1,000/year) | |||||
| Average Annual Rate of Return | |||||
| Years | 5% | 6% | 7% | 8% | 9% |
| 5 | $5,526 | $5,637 | $5,751 | $5,867 | $5,985 |
| 10 | $12,578 | $13,181 | $13,816 | $14,487 | $15,193 |
| 15 | $21,579 | $23,276 | $25,129 | $27,152 | $29,361 |
| 20 | $33,066 | $36,786 | $40,995 | $45,762 | $51,160 |
| 25 | $47,727 | $54,865 | $63,249 | $73,106 | $84,701 |
| 30 | $66,439 | $79,058 | $94,461 | $113,283 | $136,308 |
| 35 | $90,320 | $111,435 | $138,237 | $172,317 | $215,711 |
| 40 | $120,800 | $154,762 | $199,635 | $259,057 | $337,882 |
| 45 | $159,700 | $212,744 | $285,749 | $386,506 | $525,859 |
| 50 | $209,348 | $290,336 | $406,529 | $573,770 | $815,084 |
But what if you are already diligently saving? What if you have maxed out your 401K or 403B contributions, as well as your Roth IRA, your kids’ college funds and a 6 month emergency fund? You still need to ask yourself: how important is the daily latte in comparison to other things a $1,000 per year could buy? A long weekend away? A fancy Weber Grill? Upgrading the home theatre? Several visits to a spa? Paying down the mortgage sooner? (I’m confident that readers of this blog would select this last option)
Let’s dwell a moment on paying down the mortgage: a $200,000, 30 year mortgage at 4% interest has a monthly payment of $954. If you apply an extra $83.33 per month from your latte savings ($1,000 per year), you will pay off your mortgage 4 years and 3 months early while saving $22,946 in interest.
But what if you really, really need your daily latte? Then make it a conscious choice rather than a mindless habit – and I challenge you to find another $4 daily expenditure to cut. Or make it a treat just one day a week?
A possible alternative: brew a great pot of coffee at home. Our favorite is Melitta European Roast; we prefer it to Starbuck’s offerings.
The morning latte is just one of many regular expenditures that should be scrutinized: snacks from the vending machine, lunch, drinks after work, etc. Together, these routine, daily purchases can add up, causing you to miss out on opportunities to build wealth.
Cheers, Paul
PS Yet another option: buy a $2 latte rather than a $4 latte. Capital One operates cafes in a number of US cities including Philadelphia. They will serve up a Peet’s coffee concoction for half price when you pay for it with a Capital One credit or debit card.
PPS A Starbucks Grande latte (16 oz) made with 2% milk contains 190 calories (more than a can of Coke) and 7 grams of fat (10% of total recommend daily fat intake). Yet another factor for your latte decision.
© 2016 Paul J Reimold