The “latte factor” was a phrase first penned by David Bach in his book titled “Finish Rich”. He drew inspiration from how money spent on lattes can actually be hurtful to your finances in the long run. It’s apparent that lattes aren’t really a popular thing here as it is in the West; however, it’s all about the principle. The latte factor refers to expenditure that you incur subconsciously, subtly and often time that doesn’t necessarily enrich your life. This form of spending has a tendency of being addictive and routine. Any spending that’s aptly described as in my preceding two statements is your latte factor.

The Principle Explained

The “latte” aspect is more or less figurative. There are several things you spend money on that constitutes a “latte”, examples are driving as opposed to commuting to work, unnecessary monthly subscriptions or eating out. I’m basically talking about any tiny or subtle expenditure you do routinely or regularly. In David Bach’s illustration, he works with a base assumption that a latte costs $4 or $5. Let’s assume that lunch now costs RTGS$4 and you buy it every workday; that translates to RTGS$80 a month. Remember this is just one item, there are many other such expenses you incur without giving them due thought. This is what is referred to as the latte factor. Another way to look at it is that there might be certain things you buy regularly that go with other things on the side. Let me use that lunch example again; when you buy lunch you might consciously note the price of the actual meal but then be oblivious of the cost of the drink and water you might buy with it. Looking at that illustration you can see that there are many things you handle in that manner where you pass off certain seemingly small auxiliary expenses as negligible.

The principle is that you must note where you are falling prey to the latte factor and redefine your spending behaviour. Bach seems to suggest redirecting those expenses to investments. Some have taken a shot at his projections and base assumptions as too exaggerated. However, the principle is what matters since you can come up with your own projections and base assumptions. Broadly there are two options for redirecting the expenses i.e. saving and investing – or even both.

Why Is This Important?

Financial freedom or security is more than just about stockpiling money. It has more to do with disciplined expenditure; how you spend money is a huge component of how financially free or bound you to end up. There are many people I hear saying that after they get their paycheck or any income they have no clue why it vanishes so quickly. Chances are extremely high that the latte factor is playing tricks on you. The interesting about the latte factor is that the unit amount you usually get to spend seems small and negligible. Parting with that amount habitually and in most instances, daily then compounds it into a significant amount. Since this happens mainly subconsciously and with limited consideration you might never get to realize it’s the cause of your financial woes. People are generally given over to make conclusions that they are not making enough money when in some cases it can be due to unnecessary spending. So now that you know about the latte factor you can note the unnecessary expenses you have been making. This then better positions you to come up with ways of changing your spending habits. I’ll highlight some things to consider in addressing your latte factor shortly but first; let me point out something important.

Personal Finances Are Personal

A lot of the money people splash on “the latte factor” is usually driven by the quest to please people or to be viewed a certain way in society. You’ll be amazed at how bringing home-cooked lunch at work, as an example, can be taken as primitive in most workplaces. The result is that some people end up pressured to live a certain way due to societal definitions of rich life. This is worsened by the point I mentioned earlier about the unit amount seeming small. Your spending habits mustn’t be defined by society – your personal finances are personal! Now let’s talk about how to address your latte factor.

Diligently Track Your Expenditure

I’ve detailed this subject before in one of my previous articles. If this wasn’t an issue you took seriously before then I’m sure I’m now preaching to the choir. Now more than ever before, due to the economic downturn, you can’t afford to ignore budgeting and tracking expenses. Make an honest and diligent assessment of your finances by adhering to budgets and decimating any expenses constituting a latte factor. Instead of just assuming that some money you’re spending is negligible you must actually empirically calculate. I’ll remind you again that “the latte factor” spending seems small by unit but the compound sum is significant. You can only notice this if you are brutally honest about your budgeting and tracking your expenses. By the way, don’t forget that you’re bent on breaking destructive spending habits by redirecting expenses formerly channelled towards your latte factor to savings or investments.

Let me round up by sharing a real-life example of 5 individuals who came up with a brilliant way to beat the latte factor in one area of their lives. These individuals are workmates at a certain office in Masvingo. They all have cars and realized that individually it was costly to drive to work every day. They sat down and agreed to all contribute to fuel one car each week to pick up and drive them all to work on a rotational basis. I was amazed to learn that their individual weekly fuel contribution was equivalent to slightly more than 2 kombi rides. So it’s very possible to come up with witty ways to beat the latte factor.