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One of the fiercest debates in personal finance is over your morning coffee routine. People have extremely strong opinions about whether you should spend money buying an expensive, fancy coffee. I’ll refer to this as the great latte debate.

The latte factor

The “latte factor” was a term first coined by David Bach in his book The Automatic Millionaire.

The idea behind the latte factor is that seemingly small and routine purchases like buying a latte or some other fancy and expensive coffee can add up to large sums over time. Bach argues that by cutting out these small purchases and automating the savings towards saving and investing, you can generate much more wealth over your lifetime.

Other well-known personalities have pushed this same concept. Most notably Suze Orman has shamed Millennials for “pissing $1 million down the drain”. She is referring to some back of the envelope calculation showing the opportunity cost of buying a $5 coffee every day instead of investing.

Coffee shaming

These comments sparked a backlash of people arguing that spending money on expensive coffee is a harmless indulgence. The primary source of irritation comes down to the feeling that older generations are trivializing the financial difficulties facing young people today. They would point to record levels student loan debt and high housing costs as the real cause of financial strain on the younger generation.

This pushback has led to the coining of a new phrase, “Coffee shaming”.

Who is right?

The question remains, who has it right in the great latte debate? The financial “gurus” like Bach and Orman or those who say buying an expensive coffee is financial self-sabotage or the those who say it’s a harmless indulgence that we should not shame people for enjoying?

Are you pissing $1 million down the drain?

Let’s start by examining Suze Orman’s claim that buying an expensive coffee each day amounts to “pissing $1 million down the drain”. How exactly does Orman come up with that $1 million? She makes three assumptions to come up with that number.

  • You spend $100 per month on coffee
  • You could earn an average of 12% per year on your investments
  • You invest for 40 years

Let me start by saying that assuming an average rate of return of 12% per year for the next 40 years is not a realistic assumption for future expected investment returns. Wealth management firm PWL capital projects a 6.57% annual return from the global stock market. Suze Orman assumes nearly twice the annual return than is reasonable to expect. Orman also assumes a 100% equity portfolio which very few people are comfortable with.

Most people are more comfortable with the traditional 60/40 portfolio allocation to stocks and bonds. A 60/40 portfolio might expect to return in the neighborhood of 5.5% per year over the next 40 years. Investing $100 per month would result in a final portfolio value of $173,000. That is not an insignificant amount of money, but we can say with confidence that no, you are not pissing $1 million down the drain by buying your daily latte.

That doesn’t mean you should keep tilting back those lattes

Spending $100 per month at coffee shops might be harmless for some people and devastating for others.

If you are living paycheck to paycheck, aren’t saving enough for retirement, don’t have adequate cash on hand to cover a financial emergency and have a pile of debt the amount of money you should be spending on lattes is $0.

If you have a financial plan in place that will enable you to retire at the age you want, set aside money in case of emergency and allow you to live debt-free, then enjoying your latte is indeed a harmless indulgence.

As part of our financial plan, my wife and I budget a certain amount of money each month to go to a coffee shop every weekend. We spend the afternoon together chatting, reading (writing for me) and enjoying some delicious coffee. The most important point is that we budget for this luxury.

Which brings me to my main point.

The latte debate is pointless

The real debate we should be having is why so few people have a formal financial plan in place and why 61% of people don’t even track their spending.

The lattes are just the tip of the iceberg. If you don’t track your spending and don’t have a formal financial plan in place you likely have bigger problems.

  • You likely aren’t saving enough for retirement
  • You probably have no plan to become debt-free
  • You likely don’t have enough money in your emergency fund
  • You probably don’t have a written will
  • You might not have enough insurance
  • You probably spend too much on your car-
  •  You probably spend too much on housing
  • You probably spend too much on food, including eating out.

To be frank, the state of the average person’s finances is a mess. We should spend less time quibbling over pointless things like “The Great Latte Debate”. Instead, we should be having real conversations about why more people don’t have financial plans.

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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