One of the big themes of the book was the Latte Factor®: the idea that you could reach financial freedom (become a millionaire) by making very small changes to your spending and savings. As long as you automated the savings, you’d reach your goal. I love the concept, and I’ve adopted it in my own approach to savings.
I Don’t Even Like Coffee
I don’t drink lattes. I don’t like coffee at all actually. So, I never took it as an affront that the author David Bach wanted me to give up latte’s for the sake of my financial future. In fact, somewhere along the way I forgot that David actually said to give up your latte. I thought he just meant that you should save the amount that a latte cost, and you’ll be on your way to millions.
Defending The Latte Factor®
Through the years I’ve heard many people rail against David’s concept: saying that it’s crazy to give up lattes in hopes of retiring early, or with millions (i.e. why give up something that makes you happy). I cringed reading these comments because as I understood it, David hadn’t said that, and these folks were missing the point. They were certainly missing the higher-level point: that little daily savings can add up to millions over time. Well, it turns out the critics were right, but only partially right.
1. David does tell you to give up lattes (or the equivalent) in his book. But the way I see it, David’s concept relies on the idea that you don’t have room in your budget, that you are barely scraping by. If that’s the case (i.e. you have a fixed income barely covering your basic expenses), then yes, you need to cut the lattes out of your life to be able to save. Check out the ultimate guide to saving money on coffee.
But who the heck is living like that? Not many of us, and I would contend that hardly any of the folks who pick up David’s book live that way. Today’s U.S. consumer (i.e. most of the people reading this blog) have big incomes, often two paychecks per household, a very nice house, two cars, ten pairs of shoes, two flat screen TVs, and they dine out at least 3 times a week. I’m not saying those are bad things, I’m just saying that it’s ridiculous to pitch the “give up the latte” idea to these consumers. They have it all, and can afford it all. They’ll spend it all unless they start automating their savings, which David articulates very well in his book.
2. Most of us don’t have to give up anything. But we do have to start doing something. That’s the real problem that David’s ideas solve, not the Latte Factor® straw man. As a society we aren’t doing anything proactive to save. Retirement savings statistics are atrocious. It’s not because we have spent our last dollar on a latte. It’s that we haven’t put a single dollar into savings. I’ve said this before: to save money, you need to actually save the money, not just spend less. Saving is the act of physically putting that money into a separate savings account.
Takeaways from The Latte Factor®
First, in my opinion it’s short-sighted to dismiss the The Latte Factor® because you have something against frugality. It’s only one-part frugality. The other part is about small, automatic savings deposits, which is what people aren’t doing, and which is highly effective towards reaching a solid retirement.
Second, most of us have room in our budgets to save an extra $4 a day towards an emergency fund, house down payment, or retirement fund. Skipping Starbucks tomorrow isn’t the answer to our savings deficiency. We simply need to automate and separate our savings effort.
What do you think about the Latte Factor®?