I am sure you have read or heard about the latte factor. The idea that if you cancel your morning Starbuck’s latte, you can save thousands of dollars. At first, the idea is pretty seductive. In fact, it is as seductive as a tall woman with high heels and a red summer dress. However, I can tell you something: both cutting out your Starbucks or talking to the nice looking woman won’t make it happen!
What’s the latte factor and how does it work?
Coming from the doctrine of the church of Frugality, cutting down on your morning coffee comes from the principle of saving on the little things over your lifespan. Technically, if you save $5 per day (the price of your latte) and you invest it at 5%, in 30 years, all your Starbucks will be worth $83,225 (assuming you are investing on a monthly basis). Wow, this means that while you are taking a sip of your latte this morning, you are actually drinking away almost $100k!
Well, this is just quick math as you have to take into consideration that:
#1 Chances are you will keep on drinking coffee and just choose a cheaper option (such as bringing your coffee machine to work). So you won’t save the full $5 per day.
#2 Chances are that since you are being frustrated on a daily basis (assuming you really like to pickup your coffee, and this example can be applied on something else that you like to spend money on daily), you will spend a part of this money elsewhere by “rewarding” yourself for saving “so much”.
#3 The 83K doesn’t count inflation. At a 2.25%, this only equals 42K in today’s dollar. I don’t know about you, but I’m not particularly impressed by this results especially since I would have to wait THIRTY YEARS to use it!
Why Being Frugal Won’t Make You Rich
Regardless if you drink coffee or not; the point is that cutting down on small expenses won’t make you rich. I think it only creates little frustrations on a daily basis. So I’m asking you: why would you frustrate yourself during the next 30 years?
Being frugal will leads to a ton of questions:
- do you spend money on vacation?
- have/will you buy a bigger house, a nicer car, a better computer, a home theatre?
- renovate your kitchen, bathroom?
- do you buy ticket for shows? Play sports? Buy token gifts for the people you love?
Basically, each time you are opening up your wallet, ask yourself the famous question:
Is it really worth it?
Chances are that it’s not. But chances are that you will regret it later on. A few years ago, I went on a foreign student exchange program. I had spent about $15,000 over 6 months in Europe and this was one of the best investments of my life as I had seen things that I will probably never have the chance to see again in my life… until I turn 60 and retire! The $15K could have been saved, invested or used a down payment for a house. Instead, I went into debt and traveled the world. Ten years later I can tell you that it was one of the best financial decisions I ever made!
In fact, 30 years from now, you won’t regret your nice vacation by the beach, your nice house or your morning latte if you have them. But you will surely regret a mediocre life over 30 years just to be able to pay for your morning latte at the age of 60!
What will make you really rich
What makes people rich is passion; not frugality. The way I see it, your brain is the most valuable asset you have. You keep it busy with meaningless questions such as “what is better? A latte or small coffee to save $2 today” and you keep annoying the hell out of it with small frustrations and telling yourself “I can’t”, “I don’t have the money”, “I would rather save than spend”. Do you really think your brain will reward you with the greatest ideas to make money? Nope. It will tell you to go to sleep early in order to not be too tired tomorrow and to keep your 9 to 5 day job.
However, if you drive your brain with great ideas and passion and use small rewards to keep yourself going; you will discover a whole new world of possibilities. Some people that follow my net worth update will say that I am running directly into a brick wall with the amount of debt I have. However, I can tell you that 5 years ago, my net worth was barely positive and today, I am looking at almost $200K. I can also tell you that 5 years from now, I will be closing in on $1M in net worth. How am I going to do that? By working hard and smart and by rewarding myself with my morning Starbucks!
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