The Latte Factor - Small Changes Today Create Big Wealth Tomorrow

No one likes to make sacrifices. This is especially true when it comes to shopping or buying something you want. But making sacrifices in the short term can have big long-term gains that can make the sacrifices you made totally worth it. Want to know how you can build wealth for the future?

The Latte Factor could be costing you a million dollars. Think about it for a second. The Latte Factor, broadly defined, is the way tiny one-time purchases, repeated throughout the year add up to huge sums over time.

When other financial experts refer to the Latte Factor they are often relating it to a negative term. But what if you could change it around and make small positives that add up to huge sums in the future?

The Latte Factor

A single $5 latte doesn’t cost $1 million obviously, but a latte-per-day plus a few other routine indulgences can easily add up to a million dollars or more over time.

Consider a 25-year-old who picks up a latte each morning on her way to work. Let’s say she spends $25 per week on work lattes (not including evening coffee drinks or frappes on the weekend). What would happen if she switched to the free caffeine-laced brown liquid they serve as “coffee” at the office? Or made her own pre-commute coffee at home for pennies per cup?

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She could invest the $25 per week into an index fund that returns 7% per year and end up with a large sum of money by the time she was 65. How much? Over a quarter of a million dollars — $287,200 to be exact.

That’s the power of the Latte Factor.

But who wants to end up with only a quarter of a million extra dollars at retirement? Let’s amplify the Latte Factor across all areas of your life.

Here are some other small changes to consider that might save you an extra million for retirement without hugely crimping your lifestyle.

Lunch at Work

You and your buddies at work like to go out for a quick bite, right? And it’s easy to drop $10 or $15 without even trying. Brown bag it two or three days per week and you can still enjoy crazy work lunches a few days per week while saving $25 or more per week.

Start at age 25 and that’s another quarter million by the time you’re 65. Bring really awesome food from home, and your work friends might realize brown bagging doesn’t have to be boring or a bad thing.

Maybe you will start a trend of dining in, which will also give each of your coworkers a quarter-million-dollar head start.

Books and Magazines

If you stop by the bookstore and pick up a book each week you’ll be spending $15 or $20. Skip that bad habit and head to the Land of Free Books (your local public library).

Take a look at any magazine, newspaper and online subscriptions you have. Are you really reading all of that? Cancelling one or two subscriptions can save you $5 or $10 per week. That’s another $25 combined savings on books and magazines. Or another quarter million dollars by the time you’re 65.

Fluff in Your Bills

Monthly bills for utilities and services have a way of slowly creeping up. Some of that increase is inflation, but some of the increase is an insidious attempt by the service provider to get more money from you with or without your explicit consent.

To stop this, look at every line item on every bill for a couple of months and make sure you absolutely have to have every single service you are paying for. Consider these:

Cell phone providers sometimes charge for insurance on your phone. Is that something you really need? Do you get a new phone for free every two or three years already? Another area of profit for phone companies is overselling voice and data packages. Check out your historical usage versus your monthly allotment of voice and data. Could you save $20–$30 by downgrading your plan and generally stay within your voice and data limits? Do you really need unlimited everything? Could a prepaid plan fit your usage trends and save you a bundle?Cable and internet companies often start charging lease fees for equipment you used to get for free. Always check to see if you can buy your own device and avoid monthly lease fees. For $25 or $50 on eBay or Amazon, you can often buy the same device that costs you $4 to $10 per month right now. If you have multiple TVs and lease multiple devices, you could be saving $20–$30 per month by buying your own equipment.Electricity, natural gas, and water bills sometimes include insurance charges to cover damage to wiring, electronics, gas appliances or leaking plumbing. These are completely optional and don’t provide a lot of value compared to the cost of the monthly charges. Even though a single coverage might be only $6 or $8 per month, that still adds up to hundreds of dollars over the course of the year if you have a few of these optional coverages. The coverage is usually narrow or difficult to trigger such that you’re unlikely to ever suffer a loss that is fully covered by the policy.Insurance is another area where unnecessary coverage can remain year after year unless you diligently review your policy at each renewal. Are you still carrying comprehensive and collision coverage on older cars? Will you actually get much after the deductible is paid? Do you have extra homeowner’s coverage for a coin collection or the family china set that you no longer own? Are you paying a monthly finance charge instead of paying the policy in full each year? Do you carry low deductibles even though your emergency fund is more than adequate to cover a $2,500 or $5,000 deductible?

At least with lunches at work, lattes and new books, you get to actually enjoy what you’re buying, even if it’s a short-lived high. Unnecessary charges on utilities and services are zero fun. Even if you find only a few of these charges, you could easily save another $25 per week. That’s another quarter million dollars for 65-year-old you.

Small Savings Today Means Huge Wealth Over Time

Keeping your housing costs low and your transportation costs in check remain two of the best ways to save money and free up more funds to add to your savings and investments.

On the other hand, trimming discretionary expenses like fancy coffee, books and utility upcharges can add up to big savings over time too. In other words, it pays to save on the big stuff while not neglecting the smaller areas of expenditure.

On my path to early retirement in my 30’s, I always paid close attention to all the various small ways to save. It’s hard to believe that saving a few bucks on coffee or the internet bill really add up to much, but if you expand the focus on cost cutting across all areas of your life and keep up the thrifty pressure over time, I can promise you it does add up.

My family and I still buy coffee at Starbucks, dine out to celebrate special occasions, carry adequate insurance where it matters, and make small purchases when it brings a lot of value. But the mindless spending that’s so easy to succumb to stopped long ago and paid off big time in our case.

Readers: What small changes have you made recently? How do you expect this will impact your future savings?