The Latte Factor

Have you ever seen one of those calculations showing how much you could save in retirement if you only gave up your morning latte? These often show up along with your 401(k) statement or other pieces promoting savings.

The projections have been ridiculed across the board. The critics say there is no way anyone can retire by giving up their morning coffee. This is true, but it isn’t really the point of the illustration.

The point of the illustration is to drive home the real cost of spending on things we don’t think very much about. It’s easy to pop into your local coffee shop and get a warm steamy cup of coffee and milk. Or for another fifty cents you can add chocolate. It’s less than five bucks. What difference can that make?

A friend once gave me a refillable Starbucks gift card. How convenient. After spending the gift I reloaded my card and got in the habit of enjoying a mocha in the morning to start my day at work. Before long I was putting $50 per month on the card.

One morning after reloading the card, it hit me. I was spending $50 per month on coffee. If I made my own coffee at home, it would cost me less than $10 for the whole month, and that’s with milk and cocoa. What could I do with that extra $40?

For a fun exercise, you can calculate what saving an extra $40 per month in your retirement account would get you using the Latte Factor Calculator. I used a 7.0 percent return assumption and thirty years of savings. With that, I could turn my $40 per month savings into almost $50,000.

Obviously you won’t retire with $50,000 in savings. But it will help. It’s worth about an extra $170 dollars per month that you can spend in retirement. See that? $40 per month turned into $170 per month just by investing it instead of spending it.

Your morning coffee isn’t the only place where your money disappears without much thought. There are those lunches scarfed at your desk. There is the quarter of all food brought home that gets thrown away if you are the average American. What about those cable channels you don’t watch or those magazine subscriptions you never get to?

If you examine the way that you spend your money, chances are you can find ways to spend less and save more without experiencing a sense of deprivation. It might take you a few weeks to break a habit, but because these items didn’t mean much to you, you won’t miss them.

Of course the big savings are in your big choices. Housing and transportation account for a third of household spending. Making lower cost choices in these areas can grow into some serious money. A $50,000 difference in value on a mortgage is equal to $235 per month in house payments. Using the same assumptions I used for the coffee illustration, that will generate $287,000 in retirement savings or $950 per month in retirement spending.

The point here is there are no inconsequential choices when it comes to spending money. A dollar spent is a dollar not saved, and over time the value of that dollar is much larger than its value today. That means its worth paying attention to all your spending. By all means spend money on those things that are important to you. But if you cut out the things that aren’t, they may just add up to something you can retire on.

Image courtesy of nuchylee at

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.