The Anti-Latte Factor: Have Your Savings and Eat a Muffin Too

Jan 23, 2007 by

David Bach, in his book, The Automatic Millionaire, wrote of The Latte Factor®. Bach noted that through saving $5 per day (by not buying expensive lattes) and investing it, people can achieve substantial savings. As I had mentioned earlier, in The Power of Compound Interest, over the course of thirty years, $100 invested at a growth rate of 10% per year will grow to $1,745.

 The problem with The Latte Factor is that it produces lots of disutility and requires regular compliance. Spending $35 per week on lattes is a rather small luxury compared to many. If each latte takes a half hour to enjoy, by not buying lattes, you deny yourself of 3.5 hours of enjoyment each week. Also, not buying the lattes requires lots of impulse control, as you have to prevent yourself seven separate times from making a purchase.

 While Bach advocates increasing savings by reducing your budget, I think that it is important for people to consider increasing savings by increasing one’s income. The average American works about 40 hours per week (2,000 hours per year), and makes about $40,000. Thus, the average American’s hour is worth about $20. Thus, to earn those lattes, the average American must work an hour and forty-five minutes.

 I think that it would be far better for readers to try to increase their savings by keeping expenditures the same, and working two more hours each week. Why? It is far easier to dependably perform work than it is to dependably deny yourself a small luxury good. If the extra two hours of work are performed continuously (for instance, babysitting once a week), they only require one incident of weekly behavioral change. As the job quickly becomes part of one’s routine, no “willpower” is required to maintain the extra cash flow. From the moment the extra hours are added, the extra income should be directed towards savings and investments (or paying off debts). If this is not done, the person may factor the extra income into their budget, and simply consume more than in the past.

 So, those who in the past have had trouble decreasing expenses might want to consider the logical alternative-increasing earnings. It probably requires a lot less discipline than giving up the daily latte.

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  1. As one who makes $900-$1000 a month, I don’t feel that a latte at $5 a pop is a small luxury. Maybe to someone with a $40,000 a year income it seems like a small luxury. I can see where you are coming from about luxuries, but I disagree with your logic because it’s too easy to start spending the extra income, and no matter what people make, they can’t seem to live on it. Why not discount shop for food at 4 stores per trip and only buy what’s on sale? Increase means if you want, or not. Or, limit the lattes to once per week instead of one per day.

    Secondly, I have never understood how anyone like me could benefit from Scottrade or Sharebuilder with those fees for trading. So I appreciate the demonstration that you get a negative return. It reinforces what I felt about it, that it was for people with more means than I.

    I really know very little about investing, but to answer the question at the top of your blog, “how would you invest $2000,” I would seriously consider investing in responsible people at I have made three $50 loans so far, at rates between 11% APR and 27% APR. One should only lend to people they feel sure will repay, based on credit history and conscientiousness, or that can backfire.

    Also, I just joined, which allows a reader to bookmark your site using ANY social bookmarking site that they are a member of, quite easily. You could put an addthis button and gain popularity quickly.

  2. anon mturker


    It’s an interesting thought, however …

    This assumes that there’s actually a tangible monetary benefit by working an extra 2 hours per day. For many people whose jobs are salaried, there is no direct additional benefit other than brownie points with management.

    There are people who have the ability to gain by working 2 extra hours. However, even among these hourly wage earners, there’s not always ample work to justify hanging around work for the extra pay.

    For people who own their own businesses, I guess I agree with you. The extra 2 hours might well be worth it. There’s no substitute for hard work when it comes to being self-employed.

    Ultimately, I think the benefit derived by avoiding daily lattes is huge. I generally don’t deprive myself of such impulse buys, but I’ve read a few articles and the numbers make me wonder if I should cut out the chewing gum and candy.

  3. Crissi

    I have got to totally agree with you. My husband works overtime during the week and that makes more sense then me denying my kids some treat they want at the end of a long grocery shopping trip. He’s already there and his hour and half to two hours of overtime a night is time and a half. It also means he doesn’t have to skip his lunch to try and save money. Not indulging occasionally makes things worse and I think people go overboard then.

  4. To clarify, “earning the seven lattes” would take the average American earner an extra 2 hours per week, not two hours per day.

    Salaried employees obviously may have trouble increasing their income at their job by working extra hours (unless they receive overtime compensation, which may be unlikely). To earn the extra $35 each week, they could find one small job to do once a week on the side. Hopefully, the small job would even be enjoyable!

    As for investing, yes brokerage commissions do take a non-negliglible chunk. The reason why I call this site, “How would you invest $2,000?” is that when investing under $2,000, it may be hard to turn a profit due to the size of the commission. Given a $2,000 investment that increases 5% in a year (rather lackluster performance), the return after a $14 commission would be ($2,100 – $2,000 – $14 = $86). Thus, even a $2,000 investment in an equity with unexciting performance can make you $86. There is obviously the potential to make far more!

  5. Fleur

    Would I miss drinking a daily latte (or some other “Latte Factor” daily indulgence, since I don’t even drink lattes)? No, I would quickly get over it. After all, any indulgence that is daily (or at least frequent enough to form a considerable enough portion of the budget) has already stopped being special, making it less of an indulgence or luxury anyway. If cutting that daily latte makes that latte you will have once a week or once a month all the more enjoyable, so you’re not only saving money, but savouring an experience as well; double score!
    On the other hand: working two hours extra a week would take away from time being spent with family… so what would be worth more to me: keeping that latte, or keeping that time with loved ones? Now that’s an easy enough choice…

  6. LA

    it depends on how much utility you derived from the latte. I think there may be a case of dimishing returns. If you have a latte every morning, it may be an enjoyed and appreciated luxury. But what if you had it once a week, and made a home brew coffee the rest of the time. You could even mix some of that powdered cappucino stuff. Wouldn’t the utility derived from that one Starbucks Latte provide more utility than one of seven in a given week?

    Also, many lattes and muffins are not enjoyed in a steady half hour. They are picked up in the drive through, and are simply an expensive replacement for a healthy, inexpensive breakfast.

  7. I think it really matters on your situation in life and your priorities. For me personally, it is easier to spend less. I don’t drink lattes, but I am addicted to Jamba Juice ($3 a pop). I am a graduate student with a (salaried) part-time job, and I only have a few hours a week to spare. It would be really hard for me to earn extra money, given all my homework, so it is easier for me to just limit my consumption. I still allow myself to have them- they are healthy and I do live in a desert- I just don’t let myself have them everyday (unless it’s finals time :P). When I have an actual full-time job and don’t have to come home and do my homework on top of it, then I think I will probably find some part-time work to make extra money.

  8. J. Gerace, I’m a grad student too, so I totally understand where you are coming from. Personally, I don’t even drink coffee. My “latte” is the 7-Eleven Slurpee, which costs $1.28. Nonetheless, it is probably easier for me to “earn” four or five Slurpees a week than it is for me to not drink them. (Then again, the Slurpees are costing me under one hour of income each week.)

  9. Priya T

    I agree with many of the comments made here. Full-time salaried folks who don’t get overtime won’t benefit much from extra time at work. Do I like coffee? Sure. But I make an iced coffee drink at home that’s just as good as the fancy kind, AND it saves me money as well as calories since I use splenda and skim milk. I love Starbucks and do spend money there, but it is as a ‘treat’ from time to time. It’s for ‘fun’ and not for my morning ‘needed’ coffee, b/c relying on that costly need could put me out some $$. I’ve heard that if you can stick to something 30 days, it can become a habit…I think that can be applied to doing without, or getting used to, lattes.
    I think you can both cut back on spending and increase your income at the same time in a reasonable way. Isn’t that maximizing dollars coming/staying in? I work full-time at a University, but I make extra money by working for their testing dpt every few months, proctoring a test on a Saturday morning (look into this; where I am it pays 15-21/hr), or by the ‘keep the change’ program at my bank or by completing Viewpoint Forum surveys online or by sending any rebates I get to my Money Market Account. Be creative in bringing in additional cash; but be reasonable with your spending as well. Many of us Americans are rich by the standards of other countries; we don’t need as much as we think we do. Needs and wants are different.
    Here is my iced coffee recipe to save you some $$:
    Put 2 tsp instant coffee, 1 tsp splenda, 3 Tbsp hot water in coffee cup. Stir. Add 6 oz. skim milk. Stir. Add ice. Yum! Iced coffee! Suggested for daily use 🙂

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