Financial author David Bach introduced the Latte Factor as a metaphor for all the small indulgences we regularly treat ourselves to that add up over time. It wasn’t meant to single-out Starbucks as the main culprit for our financial woes, but somehow millennials feel the need to stand up for their beloved coffeehouse and defend their right to buy an obnoxious drink whenever they damn well please.
Helaine Olen (not a millennial) made people feel good about buying lattes again when, in her best selling book, Pound Foolish, she explained how the Latte Factor is a lie and buying coffee every day is not why you’re in debt. No, instead it’s the big things: housing, transportation, health care (in the U.S.) that are more difficult to cut back on.
More recently, this author whined about how millennials were being judged on their spending choices, criticizing a survey that revealed millennials spend more on coffee than on saving for retirement:
“Millennials are continually being accused of wasting money on supposedly frivolous things. In October, an Australian man named Bernard Salt wrote that he had had enough of seeing young people ordering “smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop and more. Twenty-two dollars several times a week could go towards a deposit on a house,” wrote Salt.
According to my calculation, if millennials were to abstain from their avocado toast three times a week, they’d save around $3,432 per year. Which isn’t all that much, in reality.”
Oh really? And in what reality is $3,432 not that much money? According to the author, life is unfair and millennials should just give up on the idea of owning a home, or saving for retirement, so just let them have their damn latte and $22 toast.
My take on the Latte Factor
“Take care of the pence, and the pounds will take care of themselves.”
The Latte Factor is not about Starbucks. It’s not about denying you the odd frivolous treat if you enjoy it. It’s about mindless, habitual spending that squanders your discretionary income and hurts your ability to save for those bigger goals.
But, at the risk of offending an entire generation, here’s what’s really going on: If you’re buying coffee every day, or ordering $22 toast several times a week, maybe you’re just lazy. You’re lazy, and you don’t know how to cook. You’re too lazy to brew your own coffee at home and cook for yourself.
(It’s not just you. I did it, too.)
How hard is it to make a cup of coffee? Oh, you don’t have time in the morning? Get a programmable coffeemaker, make it before you go to bed and set the timer so it’s ready when you wake up. Or maybe, I don’t know, wake up earlier.
There’s a Starbucks and a Tim Horton’s on the University campus where I work and every morning there are dozens and dozens of students, faculty, and staff lined up to get their coffee fix. That is mindless habitual spending. It’s different than enjoying a Grande, Iced, Sugar-Free, Vanilla Latte With Soy Milk once a week at Starbucks.
Buying lunch every single day. That’s mindless habitual spending. That’s the Latte Factor. It’s different than enjoying an expensive charcuterie board with your partner once in a while.
Yes, we need to get the big decisions right. But those aren’t daily decisions. Don’t buy too much house. Shop around for the best mortgage rate. Spend a reasonable amount on a car and resist the urge to upgrade every 2-3 years. Invest in a low-cost, broadly diversified portfolio and don’t trade too often.
By the way, these things aren’t mutually exclusive. You can make smart choices on the big things in life while also keeping an eye on your daily spending.
The Latte Factor is about how your daily habits shape your financial future. It’s not an attack on your irregular indulgences. So go out and enjoy your fancy drink. Just don’t lose sight of the fact that small mindless purchases can turn into big money leaks over time.
I began working in the financial services industry when I was 24 years old. A few – um – decades later, I feel I have learned a thing or two. However, like others who have been in a particular career for a length of time (I’m thinking here specifically of anyone who works with computer software, for example) what I know seems commonplace to me and I tend to think that everyone else knows it too.
So, I was somewhat taken aback when I was recently asked, “What is the stock market, anyway?”
We do get a lot of questions about investing. It’s not difficult. However, just like any other skill you need to gain some knowledge and do a bit research to be successful.
Whether you elect to go the do-it-yourself route, or prefer to work with an advisor, there’s never been a better time to be an investor. The large number of investment products available now allows you to choose what’s best for you. Many products didn’t exist for the retail investor even a couple of decades ago.
It can also be a difficult time. All those choices can be stressful. Many people new to investing don’t know where to begin. Financial terms and jargon can be confusing. Complicated doesn’t necessarily mean profitable.
Let’s face it. The days of going off into the retirement sunset with a guaranteed lifetime pension are disappearing fast. We’re basically on our own and we need information.
Do you know:
- How different fees are calculated – MERs, trailing fees, trading fees, front-end loads, deferred sales charges, account fees, discretionary fees, advisor fees – and the effect on your portfolio?
- How returns are calculated and what will be the impact of the new account-performance reports?
- How to create your investing plan?
- What is the TSX, S&P 500 and Dow and what do those numbers mean?
- Do you know what your advisor is talking about when she rambles on about smart beta, top-down investing, low volatility and fundamentals? Do you feel lost or intimidated?
- The difference between index mutual funds and ETFs?
- What are managed funds or active management?
- How to research stocks?
- What are bid and ask prices and should you just take the market price?
- How bond yields are calculated and what is a bond premium or bond discount?
- The best way to manage your RRSPs and TFSAs?
If you want to start do-it-yourself investing and find yourself somewhat overwhelmed about how to begin, or you want to know just what your portfolio manager is doing, this is the place to be.
Since everyone is unique we can’t tell you what to do or what to buy. What we can do is give you the information to help make you a successful investor.
If you have a question about investing, want to know more about different strategies, or need some terms defined in plain language, leave me a detailed comment and the topic may be worked into a future post so you can be on your way to investing like a pro.