Young Finances

Why Getting the Latte Makes You Richer

Do you have a guilty pleasure that always seems to steal attention from your financial goals?

For many people, purchasing coffee each morning is becomes their ‘expensive’ habit. Coffee is more of a want than a need so it’s often looked down upon in the world of personal finance. Financial goals such as saving money, paying down debt, and investing should take precedence over morning coffee distractions. Or so most financial ‘gurus’ would have you believe.

But coffee only costs $2-$5, depending on where you get it and the size of your cup.

In his book, The Automatic Millionaire, David Bach writes about an idea called, The Latte Factor.

It’s based on the notion that small expenses, like purchasing a morning coffee, can add up over the course of a year. Let’s say you get a coffee each day before work. Most people work 280 days per year. Let’s round up and say your coffee costs $5 per cup. This will cover those ancillary purchases such as adding the occasional fresh scone to your order. Don’t forget to include tips as well. This daily coffee run is looking expensive, isn’t it? It is. At the end of the year, this one small habit would end up costing you $1,400 annually!

While most people don’t order a latte every work day, The Latte Factor suggests that the money you spend on coffee can be saved or put toward a financial goal to help you get ahead quicker.

At the surface, this sounds like a very insightful concept. However, I don’t buy it. The personal finance community teeters between those who agree that saving money by cutting small expenses is worth it and others who believe the real savings come from big wins. I call them the Money Makers and the Money Savers.

If coffee is your thing, I don’t think it’s realistic to just stop dead in your tracks and do away with it. I’m here to tell you to buy the darn latte if it makes you happy; it just might make you richer too.

Making Coffee at Home Doesn’t Save Much

Contrary to popular belief, making your own coffee at home each morning isn’t as cheap as it sounds. You have to purchase ground coffee or coffee beans, cream and sugar, a coffee maker (if you don’t have one already) and you also have to factor in the time it takes you to alter your morning routine. You must add ‘be a barista’ to your list of morning responsibilities.

Depending on the brand you buy, a cup of coffee costs $0.70 to $1.80 a cup to make at home. Saving just a few bucks on coffee is hardly worth the hassle, in my opinion.

You May Pick up Other Habits

If you force yourself to stop buying a morning coffee, odds are you will hunt for other ways to spend that extra coin. You may do so by swinging by McDonald’s for a breakfast sandwich. Or you may grab store bought drinks as a morning pick-me-up. There’s a good chance you will still find a way to spend the money.

If made for you coffee helps with your productivity, it might not be the best decision to give it up. In order to get the most work done throughout the day, you need to be focused and work efficiently. I’m not saying go out and purchase a $10 espresso shot Mocha Cookie Frappuccino each morning, but if you feel you need or would perform better with a coffee, then by all means don’t beat yourself up about it!

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You can always pick up a drink during happy hour, use seasonal coupons or earn gift cards through Swagbucks to cut costs. When it comes to saving money and meeting your goals, there are bigger fish to fry.

Go after Big Wins

While the math behind The Latte Factor is sound, the concept is a little silly. Instead of focusing only on small details of your budget, try going after big wins. Cutting larger expenses will have a more profound impact on your budget.

Let’s touch on earning money for a moment. Getting a raise at work or increasing your income are big, life-changing wins. It’s important to balance out saving money with earning more and establishing new side hustles to improve your financial situation. Remember, the amount of money you earn can be limitless. Getting the made for you coffee can wake you up to those big financial wins.

Has cutting out lattes ever made a profound impact on your life?


Originally posted 2015-07-01 10:00:51.


Simple Steps to Become a Millionaire

“I want to be a millionaire, so freaking bad.” You might have been thinking it, but Bruno Mars sang it first. Many people strive to become a millionaire. In fact, there is even a day dedicated to those people. This year Be a Millionaire Day is May 20th. On this day we answer the question, “Who wants to be a millionaire?” with a resounding shout, “Me! I do!” While it may seem difficult to save a million dollars, there are a few tips you can use today to make it to millionaire status sooner rather than later.

Steps to Become a Millionaire

Start a Savings Account

If you plan to reach the Millionaire’s Club by saving money, then you must first open a savings account. In order to accumulate one million dollars within 30 years, you will need to save around $750 per month at a 4% interest rate.

Use this calculator to determine your required savings rate.

Lately, interest rates have been pretty low on traditional savings accounts. Instead of simply shopping at your local bank, try an online bank. Then, look into a certificate of deposit. A certificate of deposit or CD is a way for your money to earn more. CD’s sometimes have higher rates than traditional savings accounts. A Discover Certificate of Deposit is great option with flexible terms from 3 months to 10 years and you can open your FDIC insured CD account with as little as $2,500.

Begin Investing

Let your money work for you. Investing your dollars gives each dollar a job and that job is to earn more money. When you invest, each dollar has the ability to earn a return. If you decide to invest by purchasing 100 shares of stock in a company, and those shares rise in value, your money just earned more money!

However, you have to be careful because if those shares drop in value, then so does your investment and you could lose money. Investing is not as safe as saving in an FDIC insured savings account. However, over the last ten years, investments in the broad market index, as measured by the S&P 500 have averaged 8.3% per year.

Mind the Gap

The gap separates a potential millionaire from a person that will never make it. What’s the gap? The gap is the difference between how much you earn and how much you spend. That unspent portion is available for saving and investing. Growing the gap will allow you to accelerate your millionaire status. How large should that gap be? Well that depends on how soon you want to become a millionaire. A larger gap means faster millionaire status.

“The amount of money you have has got nothing to do with what you earn… people earning a million dollars a year can have no money and… People earning $35,000 a year can be quite well off. It’s not what you earn, it’s what you spend.” -Paul Clitheroe

Here are a few examples.

Patrick and Jenny are 25 and both earn $50,000 per year. After taxes they each earn a take home pay of $3,000 per month.

Patrick keeps his expenses low and saves $1,500 per month or 50% of his take home pay.

Jenny enjoys shopping, dinners out, traveling, and attending concerts. She saves $300 per month or 10% of her take home pay.

In ten years, Patrick has saved a total of $220,876 with an interest rate of 4%. If he maintains the same saving rate he will become a millionaire by the time he is 55.

In the same ten years, Jenny has saved a $44,176 at a rate of 4%. If Jenny lives long enough, she will become a millionaire by the time she is 88.

Ultimately, becoming a millionaire is a simple process that requires diligence and persistence. Ready to become a millionaire? Open a savings account, begin investing, and create a budget that allows you to spend less and save more.

This post was created as part of the Discover partnership program.

Originally posted 2015-05-20 10:00:28.