In 1999, author David Bach first brought the concept of the latte factor into popular rhetoric. The theory was simple, our small day-to-day luxuries, illustrated by the daily latte, hold us back from long-term wealth. He promised that with $5 a day saved rather than spent, we could all retire millionaires. That would be great… if it were true.
The cold hard facts are that $5/day probably isn’t going to make you a millionaire. The calculation he used depended on a really optimistic view of market returns and a good chunk of time to let that compound interest grow.
The theory is also dangerous in that it points the blame for anyone who isn’t a millionaire square at their daily choices. That’s not fair. We all need to find joy in our lives, and if that comes through for you in a daily latte, have your latte.
That blame is also a false construct. As Helaine Olen points out in her book Pound Foolish, primary costs such as housing, healthcare, and education have risen 50% in terms of how much we spend on those necessities. In the 2000’s we spend 75% of our incomes on necessities, back in the 70’s it was 50%.
What is A Non-Latte Factor?
A non-latte factor speaks to the expenditures in our lives that are necessary and eat up the majority of our budget.
Nerdwallet surveyed 2,000 adults and found that our top expenditures in this country are debt repayments, housing, food costs, utilities, transportation, and child care.
In fact, saving $4 on a daily latte is predicted to only add up to ~$40K after 20 years. Certainly, I wouldn’t turn my nose up at $40K, but it’s far shy of the promised millions.
Why Are We Still Talking About the Latte Factor?
Even while the latte factor, faced with actual math, won’t bring you the promised millions, 41% of American’s report following the advice. This concept received so much attention, it’s been beaten into our brains. Suze Orman continues to tell us to stop peeing away our wealth and David Bach continues to publish books on the latte factor.
The reason the personal finance industry keeps beating this drum is simple – it sells.
Telling someone to stop drinking lattes to become a millionaire is simple and sexy. The advice I’m about to offer below is messy, complicated, sticky, and personal.
But what the hell, let’s get into it.
I know, I know, I’m an asshole just for saying it. But here are the cold hard facts:
- 46% of American renters are considered housing cost-burdened, meaning over 30% of income is spent on rent
- While the median rental unit size is shrinking in the US, it’s still 882 sq ft. Compare that to the average size in Europe which is 458 sq ft.
- Rental prices are increasing for smaller units in the US because they are centered in desirable urban areas. Everyone is competing for the same spaces and it drives up prices.
If building wealth is important to you, then the move to remote work the pandemic has offered could be a game-changer. Check out makemymove.com. You can find cities that will actually pay you to move there.
I also recommend downsizing. We have a history of obsession with space in this country, fueled by a “keeping up with the jones” mentality. I can’t tell you how much space you need, I can tell you that choosing a more modest home is estimated to result in $250K in savings over 20 years. I’ll take a 500 sq ft apartment and a quarter-million dollars any day.
2.) Re-work your debt
Let’s just set expectations right off the bat with debt management – this most likely will take years. Unfortunately, the numbers aren’t on our side. The average American holds over $6K in credit card debt. Even with a decent interest rate (17%), it would take $548 dollars per month to pay that amount off. Almost $500 would go to interest alone.
The good news is that the average credit score in the US is fairly decent, hovering around 700. That opens the door for refinancing that credit card debt at a cheaper rate. You can check with your bank or cards to see if any of them will offer a low rate balance transfer.
Personally, I have a card from college I haven’t used in well over a decade. I called them up and they offered me 0% interest for 15 months. They won’t see a dime from me because I set up autopayments so that the balance is paid off exactly at month 15.
There’s also a good chance if you’re reading this that you’re one of the 43 million Americans living with student debt. If that’s the case, check out my blog on managing student debt here.
3.) Reduce spending on food
The average American spends $378 per month on food. However, there is a wide range in how much someone might spend in this category. Some people eat rice and beans every day, others enjoy scallops. If you make $60k/year and spend $378/ month, that’s about 11% of your take-home on groceries.
Honestly, that’s not bad. Its when food costs get out of hand that they create a problem. This could include eating out, throwing away too much food, or buying from overpriced stores.
If you find that you’re throwing away too much food, check out my blog on cutting down on spending and scroll down to the section on using your freezer.
Otherwise, take an audit of what you spend on groceries and then have an honest look at if it can be reduced. There’s a subreddit called EatCheapandHealthy that has a lot of great recipe ideas to offer.
A latte a day isn’t going to make or break you. It’s the big expenditures – the non-latte factors – that determine how much we can save.
If you made changes to a non-latte factor in your life we’d love to hear about it, leave a comment below!