How The Latte Factor Works In Real Life

How The Latte Factor Works In Real Life

Don’t sip away your financial future.

The latte factor. If you haven’t heard of it, it’s essentially this: Save your $4 a day that you spend on lattes and put it into a retirement savings account to become a millionaire after 30+ years. Or something like that. Actually, after using an investing calculator, you’d probably end up at about $180,000 or so. Either way, the plan is; stop buying lattes, retire rich. You get the idea.

How It Really Works

This idea is one of the concepts author David Bach uses is his book, The Automatic Millionaire, to illustrate that everyday choices can lead to prosperity. And while I agree with this in theory, I don’t know how well this works out practically. Actually, since I believe we live in a fallen world where impulse and emotion rule our decisions over logic and rationality, I don’t see this working out practically for 99% of Americans. Here how I think it really works:

You are in line at your favorite coffee stand or your local Starbucks, about to drop a fat $4 bill on your delicious latte. But then you remember that you don’t want to eat dog food when you retire because you’re so broke, so you promptly floor it and race your way out of the drive through line that was about to compromise your entire financial future! Phew! You dodged a bullet there, and now you contently drive to work, knowing that you are going to retire with millions in the bank because of your bold choice that morning.

Except, that $4 never made it into your Roth IRA. Actually, it doesn’t even make it through the day without being allocated somewhere else in your budget that does NOT help you put money toward your debt or retirement account. You are so proud to have saved that cash that you reward yourself by eating out with co-workers. DOH! Or you are enjoying the glory that you have bestowed upon yourself for your sensible decision that you blow your cash on candy at the grocery store checkout. Or, the money just sits in your account, just to be absorbed elsewhere, and disappears like a sock in a dryer, never to be seen again.

How It SHOULD Work

The latte factor is the idea that you can save on small things to build a large savings, specifically for debt payoff or retirement. But, as you probably have experienced, just because you save money on something doesn’t mean your savings account is going to grow by that amount. So how do you make it work? Well, the answer is as obvious as the horrible script writing in “reality shows”, but does take a little discipline. When you make a decisions to save money on your latte, transfer the amount it would have cost you to your savings account. Really, it’s that simple.

When Michelle and I were in the trenches of paying off debt, we actually used this method. We used a local credit union that allowed us to name our savings account, which we simply named “Debt Savings.” Every time we would save some cash, or have a little extra income from somewhere, we would immediately transfer that money into our “debt savings” account, and then would use that savings to make a large payment at the end of the month. This is partly how we paid down about $5,000 of our debt within a 6-9 month period (I honestly can’t remember how long it was).

We used the latte factor to our advantage and it really helped us gain momentum in paying off our debt. This is why I tell people to give your money an identity, otherwise it will remain nameless and slip through your fingers, leaving you scratching your head and wondering where you money went. You can use the same method we did, but you can name the account whatever you want. Go ahead, make your “retirement savings”, or “down payment”, or “daddy needs a new pair of shoes” accounts and watch them grow!

You can also follow David Bach’s advice and work on automating your savings. Heck, you can have your bank (just go talk to them, they can help you set it up) transfer the money for you automatically on whatever recurrence you select. That way you don’t even have a choice to waste it on Ho-Ho’s and Dorito Tacos, it just shows up in your savings automatically. And seeing as how we live in a world that is immersed in advertising 24/7, this might be the best option to cut out impulse buys.

Make It A Priority

Now, this all is great in theory, but if you don’t make it a priority, you cannot take advantage of this savings  tool. You need to look at where you money is going, and if you are not saving money or paying down your debt, you need the make it a priority. Our priorities are our filters for decision making, and if saving money is not on the list, then when you have the opportunity to save money on your daily latte, the coffee will win every time. But if you prioritize savings over lattes, you will reap the benefits (not to mention, kicking the caffeine addiction!).

Comments: Have you exercised the latte factor in real life? If you save money on something, what do you normally do with that savings? What would it take to motivate you to start using this method?


  1. You’re absolutely right: Not spending money on one thing just means it’ll get spent on something else unless you’ve got a savings plan of some sort. I friend told me recently that he’s got a mechanism set up with his bank so that every time he uses his debit card, 50 cents is transferred from his checking to savings account. So every expenditure is accompanied by a little bit of saving too. If you use your debit card regularly, this can add up to many dollars a week. I think the Big Point is: Find something that works for you, and get it going!
    Kurt @ Money Counselor recently posted..Invest in You!My Profile

  2. When I was working in an office my latte factor was eating out for lunch. I started bringing my lunch monday through Thursday and it saved a lot of money.

  3. If I save money it stays in that budget account until it grows obscenely large at which point I transfer a big chunk of it to another goal. I save a lot as is so I am not in a huge rush to transfer the money because I like to think I have really good self control.
    Lance@MoneyLife&More recently posted..What Would You Do? Pay Off Higher Interest Rate or Variable Rate Loans First?My Profile

  4. I can’t cut my Starbucks, but I do understand the principle. I just try to save as much as possible, but still enjoy the things I like. I’m in the earn more camp, not the spend less camp.
    The College Investor recently posted..Can For-Profit Education Stocks Outperform in an Economic Upswing?My Profile

    • Hey, I’m down with the “make more money” camp as well! “Save as much as possible but still enjoy the things I like.” Sounds like you have your priorities in order and are rockin’ it!

      Now, would you consider spending less in a category if you find that it takes away from your more important goals?

  5. You have a good point. I did stop going to get Starbucks to save money. But I did not have a plan, that is a good idea to have that extra four dollars or whatever the amount be put into savings. What I did is I made my own cups of coffee at home. Just making that little effort to make it. Now I will try to start planning the savings that way.;)

    • Just start by transferring a little at a time to your savings and making it so that you can’t spend it. Give that money the name of “savings”, and don’t change it’s name to “pizza” or “coffee” 🙂

  6. I have a different interpretation of The Latte Factor – I actually don’t think David Bach gets enough credit for his illustration in the PF blogger world. I don’t think his point was to skip Starbucks and to put that $4 into retirement savings instead. I think he was trying to put into concrete terms that a seemingly small amount of money, when saved daily, can be enough to fund retirement. It was a way to make retirement seem more achievable to his audience – not specifically to demonize expensive coffee but to encourage people that you can achieve a decent retirement savings by saving an amount of money that they probably regularly fritter away. I’m not sure if I’m illustrating the difference well, but I don’t think he intended to directly say that the latte money should be going into retirement accounts.

    In any case, I don’t connect with the common interpretation of The Latte Factor as I regularly go several days per week without spending any money, even a week at a time without any discretionary spending. Our “Latte Factor” was probably our apartment or what people would usually categorize as a “must.” It remains to be seen, though, whether (part of) the money we freed up by moving will go into long-term savings.
    Emily @ evolvingPF recently posted..What Do You Want Your Life to Be Like in Five Years?My Profile

    • Emily, I’m totally with you there. There seems to be two trains of thought about personal finance, cut out the frivelous spending and direct that toward your goals, or forget about the little stuff and just make sure you make wise decisions on the big stuff, and you’ll be set.

      I land in both camps, sweat the small stuff AND sweat the big stuff.

      • My wife and I looked at that and said, ha! Cut out the coffee? They’ll have to pry it out of our shaking hands. So we did what you said and figured out another way. In a joke we called it the Big Rock plan (as in Big Rock Candy Mountain. If you’re too young to know that song, you’re forgiven). It consisted of carving out the maximum ahead of time and physically putting it away. Then we had the joy of spending the main account into oblivion with no guilt. And if the money ran out before the next paycheck, we just had get by with office coffee. You want motivation to make the spending account last? That’s it right there. 🙂

        As it turned out, we usually had a little left over. We let that roll into the next month and when a month ended with more than $200 left over, we took $100 and “bonused” it to the emergency fund.

  7. I think we probably all have some sort of extravagant spending that we could reevaluate. Lots of girls I know get their hair dyed and their nails filled every couple of weeks. It’s not much money, but it definitely adds up! Do I think you should never do anything for yourself? Of course not! You’ll go crazy! I just think we should look at what’s important to us, and see if we can make it a treat instead of a given expense that we just have to live with.
    Michelle recently posted..Teaching Kids About Money: Leading By ExampleMy Profile

    • Seperating needs vs. wants in your own life can definitely help eliminate some of the discretionary spending that used to be a given, but is now a “want”. I also agree, extreme budgeting can make you go crazy, and totally burn you out if you’re not careful.

  8. You hit on one of my biggest pet peeves! Go to my site and search for my post on “double counting”. I’ll bet you get a kick out of example number 3.

    I like the idea of giving money a name. We do this for some, but not all. Like when a sushi restaurant opened up next to the grocery store and Mr. PoP wanted to go there for sushi a couple nights a month for dinner instead of the grocery store (same price, better quality!) we adjusted the grocery budget allocation and made a separate pile for “sushi”. (I hate sushi so I didn’t want it coming out of our date/restaurant budget!)
    Mrs PoP @ Planting Our Pennies recently posted..How Much Does Your Family Know About Your Money?My Profile

    • Haha. My wife is great at “double counting” 😛

      I try to give every dollar a name, because if I don’t, it will get spent, and mostly likely will NOT do anything productive!

  9. I do this myself. I use ING as my bank and take advantage of having multiple savings account. I call one my investment account. I make regular transfers into it. For example, when I finish grocery shopping, I look at how much I saved. I take that amount from my checking account and transfer it to my investment account. Every month or so, I have enough money to invest into my mutual funds. It’s simple and painless plus it boosts my savings that I would otherwise most likely spend.
    MoneySmartGuides recently posted..Sick and Tired of How Much Romney Paid in TaxesMy Profile

  10. We use similar to INGdirect I understand. You set up goals, give them a name, and because it’s not a physical bank there’s less of an overhead and I get a better interest rate than in my US bank savings account. I can set up automatic transfers every month (or twice a month, or once a week) and add money from the app on my phone every time I resist the latte!

  11. I like giving money a name. It helps me not to willy nilly spend it 🙂 My latte factor used to be spending tons of money every week (or day) on books or movies. Even with a discount, it adds up. Now, I’ve limited myself to a list and fun money. Once my fun money is gone, it’s gone. So I have to be smart: do I want that hair cut or do I want a book? Do I want to go to a race or do I want the newest movie?

    As for our budget budget, a lot of the eating out expenses was allocated to debt or, currently, our wedding fund. Even if it’s only $5, it all adds up.
    bogofdebt recently posted..How learning to manage my finances has helped my health outMy Profile

    • Our spending cash category gives us some freedom to spend on lattes if we want, but like you said, setting a spending limit is very important for keeping your budget under control.

  12. I’ve never technically used the latte factor strategy, but earlier this year I did cut out as many expenses as possible. I don’t think I ended up compensating with more spending elsewhere, but I didn’t immediately transfer it to savings either. Instead I was periodically depositing larger amounts in my retirement savings. The problem with the latte factor for a lot of people is that they still need to have a coffee from somewhere else. So they only end up saving 2 couple bucks each day. Of course the latte factor doesn’t just apply to lattes. It applies to any small regular expenses.
    Modest Money recently posted..Professional Indemnity InsuranceMy Profile

    • Yea, I think the point is to actually take that second step and transfer the money out of your main checking so you don’t spend your way through it. Cutting expenses is fun if you know it helps you reach your goals faster! 🙂

  13. That method is quite interesting. I’m always on a tight budget before the month ends. So I guess I’d better try this.
    Thanks you for giving us this idea.
    Maris King recently posted..Brisbane the worlds fastest growing mature cityMy Profile

  14. Glad to see someone else ‘names’ money. Mrs Scot and I save so much better when the money is transferred into ‘new car’ or ‘2013 holiday’ accounts!
    Savvy Scot recently posted..How does my Swedish made furniture end up in my lounge room?My Profile

  15. I don’t think we really have much of a latte factor, but we used to. We have drastically improved our habits over the past few years!
    Holly@ClubThrifty recently posted..The VIP Club – Weekly Roundup 5th EditionMy Profile

  16. We don’t really have a latte factor, as my wife and I have already made are necessary changes. I don’t necessarily agree with the latte factor, unless your just completely over the top with spending on frivolous things you can’t afford. I think the underlying issue is not making wise choices as a whole with your spending and looking for ways you csn make improvements.
    That said, I am a huge fan of naming your money. We do that for a lot of the categories we’re saving for. I love being able to put money towards our vacation fund (which gets renamed each year to where we want to go) because I know throwing that money in there gets us one step closer to our goal.
    John S @ Frugal Rules recently posted..Frugal Friday: Posts That Ruled This WeekMy Profile

    • You’re right, it’s more motivating to see an individual savings account grow if it has a name. I love seeing our “Christmas” budget, because I know we get to buy gifts for other and not feel guilty about spending the money.

      Vacation budget is also another fun one 🙂

  17. DebtsnTaxes says:

    I actually wrote something along the lines of this in my ImpulseSpend post. Although I forgot to write the post a month later on how I did haha. I ended up saving an extra $68 by not making small random purchases like I normally did. I still spent money on wants, but by keeping track daily on what I was going to spend I was able to use that money to help pay off debt. It isn’t much but it does add up.
    DebtsnTaxes recently posted..You Got Fired, What’s Your First Step?My Profile

  18. I’ve never actually used the latte factor, but I do track all of my expenses. If I spend too much on a category one month,then I make sure to cut back the next month.
    Andy Hough recently posted..Snowflake Giveaway ProjectMy Profile

    • If that category is something you don’t care about too much, lowering it a bit is definitely the way to go. but if you wanted to spend more in that category every month, no shame in raising it up in the budget.

  19. I’ve never had a latte, I don’t think, and I don’t like coffee. I think I might have purchased at drink at Starbucks or similar shops less than 10 times in my life. So for me, I didn’t have an expensive drink habit to get rid of. But I didn’t have a savings plan. Even when I wasn’t making a lot of money, I discovered ING Direct and the joys of automatic transfers to savings… and having that every week (or with each paycheck) was easy to set up, and I hardly noticed I had less money to spend.
    Flexo recently posted..For Financial Freedom: Reduce Expenses or Grow Income?My Profile

    • You and me both! I don’t drink coffee, except during tax season for two reasons 1) I’m working 80 hours a week, not including travel, and 2) The CPA I work for grew up in Italy and makes the best latte I’ve ever tasted. The only one I’ve ever enjoyed, actually.

      And yes, yes, and more yes to the automatic savings. I mean, if you don’t see it, it doesn’t exist, right? Then all of the sudden, you check your ING account and it’s a few thousand dollars bigger.

  20. I think a big point of David Bach’s is not necessarily the one latte, but the amount you spend without thinking. Latte in the AM, candy bar for a snack, lunch out, etc. Since reading his books, we have automated just about everything that wasn’t already there, and it is amazing how much you can save.
    Kim@Eyesonthedollar recently posted..Why You Should Visit a National ParkMy Profile

  21. How I’ve been consicously trying to use the “latte factor” is by not buying coffee at the store, I have more money to spend on groceries, which gives me more opportunitites to try new recipes that I can then share on my blog, helping it to grow and make me more money that I can then apply towards retirement or other important financial goals (right now, I’m much more focused on paying down my ~$60,000 worth of debt than I am saving for a retirement I hope to never have to take).
    Edward Antrobus recently posted..Egg & Potato Breakfast Burrito: Recipe SundayMy Profile

  22. Such a great post! Thanks for contributing it to the Carnival of Investing. We have included it in the exclusive Editor’s Picks section.

  23. I realized my latte factor years ago was actually lattes!

    I bought an italian espresso machine and have saved about $30k to date. The value continues to climb because we “save” ourselves $12-$15 a day depending on how many lattes we drink!
    thestarvingartistcanada recently posted..Standing out from the crowdMy Profile


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