I don’t think my “latte factor” habit amounts to much. Can it really make a dent in my budget?

We’ll get to those weekly spending habits and the latte factor. Don’t worry. But first, what’s your annual spending rate? Do you know it? I would venture to say that most of you know right off the top of your head what your annual salary is. Not that you would want to tell me, but if I asked, I’m sure you could blurt it right out.

So why don’t you know what your annual spending is?

Your annual spending is just as important as your annual income, maybe even more so.

So Why do I care about an Annual Spending Number?

Sometimes it helps to see the bigger picture. Can you tell what is in the picture? No? Maybe it would help to zoom out. Check out the picture later in the article to see the whole picture.

If you only ever look at your budget (income and expenses) on a monthly basis, it’s like you are standing directly in front of a giant tree – or looking at a zoomed-in picture. That tree is blocking your entire view of the forest. (can’t see the forest from the trees).

Take a step back. You don’t have to do this all the time, but I think it may open your eyes to how much money you may be wasting – or not wasting.

The latte factor essentially states that the small expenses that we don’t think much about can add up to a significant amount of money over time.

Let’s Get Started

So, do you have a budget? Are you tracking your spending? I track my spending using Quicken. You could use Mint or Personal Capital.

The easiest way to figure out your annual spending is to run a quick report using last month’s transactions. Multiply the total by 12.

Use a little bit of common sense, because you don’t want to include an expense that you only have once a year, like car insurance. That will throw your numbers way off. But you do want to include it in your annual spending.

Another way to do it, is to take your monthly budget, subtract out the savings portion, and multiply the rest by 12. That’s assuming you actually spend on plan, and stick to your budget.

Of course if you have tracked your spending for a longer period, you can use more than one month. I’ve been tracking my spending for years, so I can go back quite a ways, even to before I became the “Cash Dad”.

What’s the difference between your annual spending and your annual income? Does the number make sense? This amount of money is crucial to retirement and a host of other financial goals.

This is the amount of money (after taxes and health insurance) that you should be using in some form or another to help your financial situation. You could use it in a 401k, savings account, debt re-payment, or other investment vehicle. The latte factor certainly contributes to this number, and we’ll talk more about it in the next section.

But first, if you can save $10,000/year in a good index fund that compounds at 7% (market average), in 10 years you’ll have $138,000 ($100k is your money). Pretty cool right? If you keep doing that for another 10 years, you’ll have $410,000 ($200k is your money) That’s compounding interest for ya. So how can we get to that $10k/year number?

Related: Compound interest makes Your Savings Soar.

Do Those Little Transactions Matter (the Latte Factor)?

latte factor explained

So what about those small everyday expenses? As a real life example, let’s look back at some of my old transactions (from before I wizened up).

I do get slightly sentimental when I look over some of those old transactions. You can imagine a tear trickling down this grizzled face if you like (although my face isn’t actually that grizzled).

When I first started looking at my spending annually, it was an eye-opener for me. For instance, we spent $3,408 over a year-long period between 2014 and 2015 just at Wal-Mart for miscellaneous stuff.

How much do you spend at Wal-Mart? I think the answer might surprise you.

But that’s the point of this exercise. When you see how things add up annually, you start to think about them in a different light. Maybe you don’t need to go to Wal-Mart today. What about the money you currently spend at fast food, coffee shops, or doughnut places?

If I had cut out half of my trips to Wal-Mart, and saved that money instead ($1704), I’d have $23,515 compounded over 10 years. That includes over $6,000 in interest earned just from cutting my Wal-Mart spending in half!

So in one year of paying more attention to my spending, and being aware of the latte effect could net me $23 grand in ten years!!

Now imagine that you spend $4.72/day for a trip to Dunkin Donuts for a coffee and a bagel. You do this 5 days a week, because of course you can’t start work without a complete and balanced breakfast. If you were to cut this out entirely, and drink the free coffee at work instead, you could save around $1,180/year. This will turn into $16,284 in ten years.

That’s the hard part though. Thinking about things in terms of ten years later. Cause most of us don’t want to wait that long to experience the rewards of our self depravation.

What to do Now.

Start saving! Try to determine what your “latte factor” spends are, and eliminate them. Obviously, if you enjoy something, don’t necessarily cut that out. You’ll be miserable, and I’ll be to blame. But the point is still valid, our excess daily spending can turn into thousands of dollars given enough time.

So, where do you want to be in 10 years? Spending $20/week on coffee with no savings, or would you rather add over $17,000 to your fat investment account?

Little changes can turn into big results over time. Click To Tweet

This is the secret to wealth. It takes time, and minimizing your own spending only gets you there faster.

So start a saving habit, instead of a “latte factor” habit.

Are you minimizing your spending while trying to maximize your saving?

Let me know in the comments, and thank for reading and sharing.


Chris is the original Cash Dad. He's a father of 3 and a mechanical engineer by trade.

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