Let’s talk a little bit about the latte factor, a phrase coined actually trademarked(!) by David Bach in one of six books that really just say the same thing over and over again.

You’ve seen this tweet before, but screw it. I’m including it again.

It goes something like this. If a young lady were to cut out her daily $4 fancy coffee and invest that cash for 40 years instead, she’d end up with a metric assload of money. According to my compound interest calculator, $4 per day invested at a 10% return over four decades works out to a nest egg of $776,882.16. That’s probably enough for a pretty comfortable middle class retirement assuming inflation stays reasonable.

The whole point isn’t anti-coffee, much to my chagrin. How do you people drink that stuff, anyway?The point i  little costs have a way of adding up and becoming a big deal. Cutting out just a few of these costs and channeling the cash into savings will have a positive impact.

This is a valuable message for many personal finance newbies, and maybe even a nice reminder for the rest of us. Last week when I argued that cable is pretty cheap entertainment all things considered, regular reader Ricardo reminded me in the comments that $2 or $3 per day for cable still adds up. And he’s right. You will be richer if you don’t have cable, don’t go for coffee, or whatever.

So while I agree with the overall message, I’d argue the latte factor itself is kinda dumb. Here’s why.

Making more is far better

I’ve never really been a big fan of micro frugality, even though my wife can attest just how painful it is for me to spend money sometimes. Y’all should have seen how stained my hat got before I bought a new one.

Don’t you know how to wash things?


I’d much rather find a way to make more money. A lot of times this involves working longer or harder, but most of the time it involves getting some sort of passive income. I invest a lot in private mortgages, dividend paying stocks, real estate, and other passive pursuits.

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Say I’m just starting on my financial journey and I’ve managed to save an extra $10,000. If I invest that at 8%, I’ve generated an additional $800 per year in income. That works out to $2.19 per day or… about the cost of a latte.

It’s like the latte factor but in reverse.

This gets all the more powerful the more you have saved up. $100,000 at 8% works out to an extra $8,000 per year. Or, to put it in latte factor terms, an extra $21.92 per day.

Let’s look at it another way. Say you work really hard and get yourself a 5% raise each year for a decade. You start out making $40,000. After ten years you’re up to just over $65,000. Even after taxes, you’re generating huge amounts of extra cash that can be invested. It’s a lot easier to save money if you make more of it.

Focus on big wins

I’ve said this so many times I feel like I’m repeating myself, but whatevs. Maybe you kids will figure it out this way.

Small things have a way of adding up. But it’s the big things that matter.

I know normally smart people who willingly sign up for crazy-long commutes, have houses with way too much space in them, or who don’t bother to ever shop around for some of their big annual expenses. These folks could easily put thousands of dollars in their pockets by moving close enough to work to walk or cutting their family down from two vehicles to one.

In the two vehicles post, I figured it would cost us an extra $3,000 per year if we had two vehicles. To use the latte factor math, that works out to about $8.25 per day. By making one big decision, I was able to make a bigger impact than making a number of small decisions. Do that a few times and you’re really making progress.

Look, a lot of you reading this don’t really have to optimize your finances. If you’re here, chances are you’re already much better at saving than the average slack-jawed yokel. You already watch the little things and probably most of the big things too, on your way to a 15% or 30% or even 50% savings rate. If you’re saving a third of your income, who cares if you have a latte. Double fist those bad boys for all I care. Raising your savings rate from 33% to 35% is going to do nothing but get you slightly richer in the long run. Whoop-de-do.

There’s nothing wrong with trying to cut some of the little things from your life–provided you’re sure these things bring you no value. But ultimately what bugs me about the latte factor is the limitation it implies. Cutting expenses is good. Increasing income is better. Much better.

Tell everyone, yo!