Focus on the Big Wins to Succeed at Personal Finance

It seems like everyone has heard of the latte factor, which was first introduced by author David Bach. It reminds people of an important personal finance truism, which is how little costs add up over time. A $5 latte daily adds up to nearly $2,000 per year.

There’s just one problem. Many people do so poorly on their big expenses that the latte factor doesn’t matter that much.

Look at it this way. If I rent a two-bedroom apartment for $1,300 per month despite being able to live comfortably in a one-bedroom place for $1,000 per month, I’m wasting far more money than I would if I picked up a take-out coffee each day.

It’s the same thing with other large expenses. A $500 car payment will hurt someone’s finances a lot quicker than the occasional small indulgence. So will an hour-long daily commute.

Besides, the latte factor doesn’t give people enough credit. Yes, little things add up. But most people who are struggling aren’t wasting all their money on small indulgences. They’re in tough shape because of their large expenses.

There are two solutions. Someone can either make more or spend less.

Making more might end up being the easier solution. It takes a lot of work to move or getting used to a roommate after living alone for years. Some people might not even be able to afford moving.

Ultimately, larger expenses matter more than the smaller ones. One big move is worth a lot of lattes.