The Latte Factor; Likely Not Going to Make You a Millionaire

Have you ever heard of a theory called the Latte Factor?  The theory goes that if you gave up your $5 a day Starbucks latte and invested that money over time you would reach a sizeable amount of money to help you achieve your retirement or some other wealth management goal.

Here is the math on this theory using one scenario:

Latte Factor

While slightly coming to an amount over $72k that spans a 25-year period is nothing to snicker about, it is hardly going to make you a millionaire.

Here are some further assumptions that I used and why they aren’t likely to happen:

  1. Compounded monthly return – compounding is that magically formula that keeps on giving in the world of finance.  It is the rate at which your money grows without you having to do anything to it.  I used monthly because you would get a bigger bank for your buck vs. annually or quarterly compounding, but less than if I would have used daily.  The more frequent the compounding schedule, the more compounding works in your favor i.e. the more money you make.  The problem with this is that no investment option is likely to pay out a steady gain of 6% annually compounded on a monthly, quarterly, or even annual basis especially if you invest the money in the stock market.
  2. Length of time to invest – any of these assumptions can be changed (you can email if you would like to receive the simple excel file that I built for this) but I used a 25-year period given that it is likely a good duration of time in order to save for retirement.  However, do you realize how much discipline it would require to not only save the expense of the latte Monday thru Friday, but then to have the extra discipline of not touching the money that you are saving for something else?

Bottom line, I see two major factors working against you; the ability to sustain a constant return over time and the discipline to save and not use the money over time.  So if saving $5 on a latte or some other small daily or monthly expense is not going to make you a millionaire then what will?  Paying attention to the “big stuff” might help you reach that millionaire dollar bogie.

So what are some examples of big expenses to look out for:

  • Buying a house
  • Buying a car
  • Choosing where to live
  • Choosing where and what to do on a vacation(s)
  • Where you go to college
  • Having children

But just as important, here are some of the big items on the income side which could help you prosper:

  • Deciding what profession to enter
  • Determining how much time are you willing to invest in yourself to advance your career

While many people would like you to believe that by cutting back on the small things in life will get you to where you want to go in your wealth plan, that is simply poor advice.  People need to focus on making the right financial decisions when it comes to big items in life.  The issue is that many people spend more time analyzing the small items such as what big screen TV to buy or what smart phone to go with vs. spending more time analyzing how much you can afford on a monthly rent or mortgage payment.

At the end of the day there are two key tenants that will help you achieve a financial goal, save more and spend less.  While return on investments play some role in helping you to reach a big financial goal such as retirement, these two basic ideas of saving more and spending less is what gets you to the financial mountain top.  However, these two ideas are enhanced with the right financial plan and a strong discipline to follow that plan.

What I am Reading This Week

You’ve Bought a Small Business. Now What? (NYT)

Since the Recession, We’re Spending Again—But With Less Income (WSJ

What are the chances of a recession? Not what you’d think (WP)

Smartphones Are Boring: Here’s What Happens Next (WSJ)

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