The Latte Factor: Should You Give Up Your Coffee Habit to Reach Financial Independence?

Pumpkin spice season came early this year! Even though it’s still 100+ degrees here, I decided to treat myself. I was reminded of the “Latte Factor” as I shelled out over $5 for my pumpkin cream cold brew, and momentarily wondered… should you give up your coffee habit to reach financial independence? I quickly dismissed the idea and sipped my drink without guilt while dreaming of cooler weather. For me, it was easy to answer “no” to this question, though it may not have been a year ago. My coffee purchases are pretty rare now and give me a lot of joy when I do indulge. But is this the right answer for everyone?

What is “the Latte Factor”?

I first learned about the Latte Factor from David Bach in his popular book and have since seen it referred to numerous times in the financial community. The book focuses on a Millennial professional struggling to meet ends meet despite having a solid job. Indeed, through the book we find that it’s the small routine purchases, such as a daily latte habit, that can ultimately slow down or prevent us from achieving financial independence.

Most of us wouldn’t think twice about swinging by our favorite coffee shop to pick up a latte. After all, it’s only a few bucks. However, when you are spending those few bucks every day the impact on your budget and future net worth can be significant.

Despite some of the criticisms of the book, the Latte Factor isn’t meant to be a war on popular coffee chains. The theory demonstrates how small unnecessary routine transactions can sneak their way into our spending habits and wreak financial havoc. And the truth is that most of us don’t just have one latte factor. We often have several such transactions. The effects further compounded when you consider that these small amounts of money could be invested each month, if they weren’t spent.

My latte factor

By the time I left my last corporate job, I had developed a habit of stopping at a well-known coffee chain on my way to work to pick up a latte or cold brew most mornings. I was miserable at work and believed I deserved a “treat” for getting out of bed and suffering through the day to earn that paycheck. I feel the need to use parenthesis around the word “treat” because it’s not really a treat if we allow ourselves to indulge daily, is it?

Of course, I didn’t need to purchase coffee out. We have two coffee machines at home. Fabulous ones, in fact, that make delicious coffee at a much lower cost: a Breville for everyday and Nespresso for special treats. However, because the daily cost of my morning habit was only about $5, I didn’t worry about it. That amount felt insignificant when compared to the take home pay.

Not only did these “treats” cost a lot of money, but they were loaded with sugar and calories. I gained several pounds during my last year of work. It’s no coincidence that I had trouble maintaining a healthy weight when sugary lattes were a part of my daily diet.

Since leaving the stress of my corporate job behind, I don’t feel like I need to “treat” myself every morning. I now only get the urge about once a month. Because it’s been a while, I can indulge without any guilt as to the money spent or the impact on my waistline. Indeed, reducing the frequency of my coffee trips has brought more happiness to each occasion.

How big is the latte factor?

Depending on the frequency and amount, as well as your timeline to retirement, the financial impact can be quite significant. Luckily, there are several free calculators on the internet that can help you determine the impact of these routine expenditures so that you can make an educated decision. I use this free calculator.

The true cost of these purchases is more than just the cash you paid. It also includes a return on investment that assumes you would have invested the same amount if you hadn’t spent it. If a purchase is truly unnecessary, then it should hold true that you could invest the cash as an alternative. This is your opportunity cost.

Okay, time for some real numbers

Here’s an example. Let’s assume that you stop at your local coffee shop for a latte on your commute every workday. Let’s also assume that you have enough will power to turn down any delicious pastries or other breakfast items on most days so that the average purchase is $5 per day, or $25 per week. Yep, this was me a few months ago. If you were to forgo these purchases and invest the $25 each week at a rate of 6%, you would have a whopping $108,822 after 30 years. The $108,822 cost includes the $39,000 you paid for the lattes and $69,822 in lost investment earnings.   

The higher the interest or growth rate you use, the greater the true cost of your habit. Some calculators default to rates which are quite aggressive and may not represent market growth you are likely to experience. Of course, estimated growth rates are just that – estimates. Don’t penalize yourself by using overly aggressive rates. Stick to calculators which let you choose your own rate of return. Currently I use 6% to estimate stock growth in my own personal financial analysis. As such, this is also the rate I use when calculating the opportunity cost of routine purchases. Feel free to use whatever rate you prefer, but be consistent. Even at 6%, the numbers may still shock you into thinking twice about daily purchases.

Limitations of the above analysis

These calculators have a few limitations which aren’t always addressed. Besides the fact that we can’t predict future returns on investments (I wish), the main limitation is that the opportunity cost calculated assumes alternative spending is zero. This is often not the case. I can assure you that I did not stop drinking coffee altogether. Coffee is great and I drink several cups a day. I just make it at home. I’m guessing  most people buying coffee daily would not be willing to give up coffee altogether either, and you shouldn’t have to. 

When I was working in a corporate office, my alternative was free coffee at work, so this analysis still worked. My husband, on the other hand, doesn’t like the free coffee at his office, so we make his at home most days. This will partially offset the projected savings shown by the calculators. However, a cup of coffee at home often costs less than a quarter, depending on the quality of beans. The cost is only a little more if you also include depreciation of the coffee machine. In either case, it’s much less than that which you would pay at a coffee shop. For example, the cost of our regular brewed coffee comes out to 21 cents for a 12 oz. coffee, as compared to $2-$3 when purchased out. Similarly, we can make a 12 oz. latte at home for about $2 cheaper.

So, should you give up your coffee habit to reach financial independence?

Here’s my two cents. If buying coffee each morning is the highlight of your day and you’re not living below your means, then don’t beat yourself up about it. It helps to be mindful about spending when pursuing financial independence. However, it’s also important to enjoy life and use money for the tool that it is. Don’t feel guilty about spending on the things which give you the most joy. We don’t, and consider value-spending to be a significant part of a rich frugal life.

I challenge you to at least consider if you might be able to obtain a similar level of happiness while reducing the frequency of your purchases. The theory of “hedonic adaptation” suggests that humans have the tendency to quickly return to a relatively stable level of happiness despite positive or negative events. Hedonic adaptation is the reason we often fail to appreciate the good things in our lives and constantly strive for more. Applying this theory suggests that indulging in your fancy coffee less frequently should ultimately make you happier than indulging daily.

Reducing purchases will also increase your savings rate. Could you cut back a little without feeling deprived? Give it a try. If you currently buy coffee five days a week, try just a few days. If that doesn’t hurt, try making it a weekly treat. The financial impact could be significant over time! If you only purchase coffee once a week instead of five times, the cost for 30 years drops from $108,822 to $21,764. That’s an additional $87,058 you could have in your investment portfolio without completely sacrificing it! If you feel like those missing coffees are worth it, then add them back. No harm done and you saved a couple of bucks while trying.  

Something to think about

As mentioned above, the “latte factor” isn’t just about coffee. It is about the small routine purchases we take for granted and the impact they can have on our success in reaching financial independence. Look at your spending from the last couple of months and see where the small dollars are going. If you see any easy opportunities to cut back, I encourage you to at least give it a try. In fact, reducing these purchases could actually help you enjoy them more.

Is your coffee habit out of control? What routine purchases do you feel like you could cut back on without feeling deprivation? Drop a comment below to share.