You’ve likely heard of the latte factor, a term popularized by author David Bach in the 1990s.
The premise is simple. Small expenses--like lattes--have a way of adding up over time. If someone chose to invest the $4 per day normally spent on coffee over a 40-year period at 8%, they’d end up with a nest egg of $440,000.
That’s enough to make a big difference for the average person’s retirement.
Even though it’s easy to see the logic behind the latte factor, opposition to the concept has been strong over the years. Naysayers argue that larger costs are the ones keeping us down, not small things like coffees.
In the United States, the cost of health care and university has greatly exceeded inflation for decades now. Canadians might enjoy cheaper health care and education, but we’re still paying more than ever for things like housing, especially in large markets.
The important thing to realize about the latte factor is this. If small costs matter, then big costs matter a lot more. Big changes might not be easy, but they can have a huge positive effect on your finances.
A big raise at work will increase someone’s savings rate a lot better than cutting out coffee. So will moving within walking distance of work, ditching the new car for something $20,000 cheaper, or cutting out all restaurant spending.
These are the changes that really matter. Focus on them to really make a difference.
