The silky-smooth latte with just enough caffeine to jolt you awake in the mornings has a bad rap. But how could something with adorable latte art have such a disastrous effect on your budget?
Ask David Bach, the millionaire and financial guru behind The Latte Factor. This financial principle exposes just how much money your daily cup of Joe costs you in the long run.
Bach casts it as the bad guy in your finances; it’s the reason why you don’t have savings and need to rely on an online personal line of credit when something goes wrong unexpectedly.
All in all, he says it swallows up $2,000 of your hard-earned money each year. He also claims that you could save $1 million for your retirement simply by skipping the latte and investing the money.
Sounds too good to be true? You’re onto something! Here are three reasons why the Latte Factor may not work.
Reason #1: It’s Bad Math
It’s easy to trust a talking head in a video hosted by CNBC and CNN who claims to have all the answers. But sometimes, it’s worth fact-checking what they have to say.
According to Bach, a $5 latte purchased every day for an entire year would cost you $2,000. But punch these into a calculator and you’ll see he’s fudged the numbers.
$5 x 365 = $1,825
Now let’s look at a Starbucks menu. Even accounting for the latest price hike, a Venti latte costs $4.15.
$4.15 x 365 = $1,514.75
That’s a difference of nearly $300! Admittedly, this may be a big boost to your budget. It would be a solid start to an emergency fund, a considerable payment against your online line of credit balance, or a way to knock out a loan from an online direct lender.
But when it comes to investing, a $300 difference may affect how long it will take you to reach $1 million.
Reason #2: It’s Unrealistic
However you invest it, $1,514.75 a year is a considerable sum. But no matter how you slice it, it’s not $1 million.
To reach this savings goal, Bach’s calculations rely on snagging an interest rate of 11 percent. Other financial experts think a rate of return this high in unlikely, and they may be right. The average 401(k) offers an annual return rate ranging between 5 and 8 percent.
Reason #3: It’s for Rich People
People are only poor because they aren’t working hard enough at budgeting. That’s a common belief underlining a lot of financial advice you read on the Internet.
While it’s true, some people are living paycheck to paycheck because of overspending on splurge items, most are in this position because they don’t earn enough for their immediate needs. They aren’t spending $5 a day (or $4.15, more accurately) on a latte because all their money goes towards rent, utilities, and other essentials.
Telling people they can solve their financial problems simply by eliminating what Bach calls “the daily extravagances that drain your resources” only works if you have the resources to make these luxury purchases in the first place.
For everyone else, the fixed costs of hard-to-change expenses (things like rent and healthcare) are what’s more likely draining your finances. Giving up an occasional latte won’t fix these chronic issues.
