The latte factor has become such a frequently discussed concept in the personal finance space, there’s now a whole (conflicting) dialogue about it online, and even a namesake book.
If you’re not familiar with it, the latte factor essentially refers to how we spend small amounts of money regularly on unnecessary on low-value things. While the concept grew out of the middle-class trend of buying daily lattes and other barista-made coffees, it can of course apply to any small but overpriced thing you regularly spend money on.
David Bach, the author who wrote The Latte Factor and brought the phrase into the everyday narrative, even has a latte factor calculator over at his website. I just had a play with it. I found out that I could give up my $4 daily latte, invest the money at a 5% return and be just over $100,000 better off in 30 years’ time.
The concept is sound, but the assumptions that have grown up around it are controversial and potentially distracting from a more important narrative. Sure you can save significant money over time by ditching the designer coffees or other little luxuries, but are these small luxuries really what’s preventing younger people in the US, and all around the world, from reaching financial freedom?
There’s a whole section of commentators online who insist it is. A significant section of the baby boom generation seem convinced that the only reason their grandchildren aren’t able to buy a home at 25 – as they did – is that darn designer coffee trend. They seem to think the reason young people are poor these days is all down to the lattes. But a lot of things have changed in two generations, and a Starbucks on every street corner is only one of them.
The Problems with the Latte Factor
There are a few issues to keep in mind when it comes to the latte factor. The first is an obvious but important one.
Those on a Low Income Don’t Actually Spend A Lot on Lattes
The idea that people are poor because of coffee simply doesn’t make sense. Spending money on small luxuries has become a common accusation aimed at almost everyone. But that’s far from accurate. This is something that the affluent perhaps don’t fully understand. For those who are genuinely low-income a barista-made coffee is already a rare treat, rather than a daily indulgence that’s costing them 4 figures over the course of a year. There are a lot of other things keeping young Americans financially insecure.
A Lack of Financial Stability Is Linked to More Systemic Stuff Than Lattes
Gen Z are coming of age and are saying they’re not expecting to be able to get on the housing ladder. Millennials have been saying the same stuff for years. A lot of Boomers are saying they could if they gave up the lattes, among other things. To be honest, I’m Gen X so I mostly stay quiet about these things, but I also seem to be defending my Gen Z coming-of-age kids a lot because I see their issues up close.
As I worked out above, it’s going to take 30 years to save up $100,000 through giving up that daily latte, even with compound interest (much less than the median house price even in the very cheapest state in the US). And if you ‘just’ want to save up a decent down payment of say, $30,000, plus a few thousand for legal costs? That will take around 15 years. So buying a house at 25 is an understandable challenge.
All this of course, is assuming you don’t need that extra money each week to do other important stuff like paying off student loan debt, which is also around $30,000 for the average four-year college graduate. It also assumes a static housing market, which simply isn’t the case.
Even in the cheapest state in the US, where the median price of a home was just $107,927 in 2021, that figure had risen to $129,103 by 2023. It’s getting harder and harder to out-save a rapidly increasing real estate market in the US, as in so much of the world.
So What’s the Take-away?
Ultimately, giving up designer coffee, and other little luxuries, will help you save money, but the lattes aren’t the reason you can’t reach financial freedom, or buy a home right now. Other than hoping for a housing crash (it’s possible, they happen), there are a few things to think about if you’re a Millennial or Gen Z aiming for financial freedom and/or home ownership. Some things you may want to consider:
- Think bigger than lattes – you can deprive yourself of your favorite coffee every day for 3 years to save $5,000, but honestly one slightly more drastic move (like finding a job that pays $5,000 more, or living rent-free with family for a few months) will have the same outcome, much quicker.
- Think creatively when it comes to home ownership – millennials (and even Gen Z) are finding ways to buy homes, but they’re often a little unconventional.
- Think about whether you really want to aim for the same goals your grandparents did. Home ownership may not be right for you anyway.
- Think twice before you start your working life with $30,000 of student debt. Are there other ways you could fund your studies or cut your costs? Do you even need that degree?
Ultimately, the personal finance challenges facing many younger Americans these day are bigger than a daily cup of coffee, and bigger problems sometimes require bigger solutions.
Frequently Asked Questions
What is the latte factor?
The latte factor is the idea, popularized by author David Bach, that small recurring purchases like a daily coffee add up to large sums over time, especially if that money were invested instead. A $4 daily coffee costs about $1,460 a year before any investment growth. The point is less about coffee and more about noticing where everyday money goes.
Is the latte factor a myth?
The math behind it is real, but it can be misleading. Cutting small treats rarely solves bigger problems such as high housing costs, student debt or low income, and people with tight budgets often do not spend much on lattes in the first place. Most people make more progress by focusing on large fixed costs and increasing income than by giving up small pleasures.
Which expenses make the biggest difference to saving money?
Housing, transportation and debt payments usually take the largest share of a budget, so reducing those often frees up far more money than trimming small purchases. Examples include choosing a less expensive home or location, keeping a car longer, and limiting how much you borrow for school. Raising income can matter as much as cutting costs.
Should you stop buying coffee to save for a house?
Skipping coffee alone will rarely fund a down payment, because the savings are small relative to home prices. A more effective approach is to set a specific savings target, automate contributions, and look at larger costs and income options. It also helps to ask whether buying a home fits your goals and timeline in the first place, as discussed in our guide to whether to buy a home or rent.
About the author
Contributing Writer, Wealthtender
Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine.
Karen provides copy editing and proofreading services, as well as content creation services, at her website KarenBanes.com.