Matt Paulson argues the "latte factor" misses the point. The math on compound interest works, but skipping coffee assumes you'll invest the savings instead of spending them elsewhere, and ignores that coffee meetings generate business deals. He had 150 to 200 coffee meetings a year and spent over $10,000 at coffee shops in five years. Better to earn more than obsess over small daily costs.
Questions this video answers
More than $3,600.
More than $10,000.
Between 150 and 200 per year.
$3.50 per day over 40 years (yields more than $50,000).
Approximately $300 a month; more than half a million dollars over the next ~30 years if invested.
Chapters
Hey, guys, Matt Paulson here. I want to talk about the concept of the latte factor in this video. It was popularized by a financial author named David Bock. And the idea is that recurring small purchases like coffee, cigarettes, and ordering pizza every week add up to just a ridiculous amount of money over the course of kind of a working lifetime. So say you spend $3.50 on a latte every day of the year over 40 years, that adds up to more than $50,000, a lot of money. But what really adds up to a lot of money is if you, say, were to take that $3.50 and then go ahead and invest that in the stock market over, say, 40 or 50 years, you know, honestly, like, the math makes sense. You would have you take 350 a day, you know, dollar and change a month, invest that in the stock market over 40, 50 years, and you have close to a million dollars by retirement. The math behind the latte factor is totally correct, but putting it into practice is much harder than it sounds. And it's also based on some kind of pretty flawed financial concepts about wealth building and retirement planning. And I really wanted to dig into it a little bit in this video. So I was recently curious just to see how much money have I spent at coffee shops in the last year when after this kind of principle, the idea came up in conversation. And according to my credit card statements, I have spent more than $3,600 at Queen City Bakery in 2019. And honestly, not much of a surprise to me. I eat breakfast and coffee there pretty much every day except Tuesdays when they're closed. Also, I have all my coffee meetings there. A lot of our work meetings happen at Queen City Bakery. So the fact that we spent a lot of money there isn't really much of a surprise to me. So if I were to skip my morning trip to Queen City Bakery between now and retirement, have an extra $300 a month to invest, it would add up to, and I actually invested the money, it'd be more than half a million dollars by retirement over the next kind of 30 years. Does that mean that my morning latte habit is sabotaging my ability to save for the future and my retirement? Does it mean I should break up with my favorite coffee shop so that I can put away an extra $300 a month for my retirement years? You probably know what the answer is going to be, but I do think it's worth kind of explaining why I think the skip the latte advice probably isn't financial advice that you should take seriously. So as I dig into this and think about this just a little bit more, there are really about three flaws just in the concept of the latte factor that I think are worth delving into. First, the latte factor assumes that wealth is finite, scarce, and that it needs to be preserved at the expense of your daily enjoyment. You know, if you had a fixed salary where your income doesn't change months year to year, outside of maybe a cost of living adjustment, you probably want to have more of a strict budget just to make sure that you are putting away enough money for retirement. In that scenario, you really do need to maximize the dollars that you make so that you don't run out of money when you can't or don't want to work anymore. But I just don't think that wealth is a scarce resource. I think wealth is abundant. I think it's that most people aren't willing to learn the skills or put in the work to acquire more of it. There are always more ways that you can make money. Especially in the era of 2% unemployment rates. You can always go get a better job. You know, side hustlers are abundant. You can go drive for Uber, you can do whatever. And you know, there are plenty of people that have six and seven figure online businesses. Even here in Sioux Falls. You know, more and more people are finding ways to make an income outside of their day job. You know, people invest in real estate, they sell stuff online, they start businesses, they do side hustles, gig economy stuff. And it's just becoming very common. In fact, you know, I think the idea of moonlighting may actually be the default now and not just something that Dave Ramsey fanatics do to get out of debt. So just don't assume that the only income that you have. Excuse me, don't assume that the income you have now is the only income that you're ever going to get. Just get out of a fixed mindset about wealth and start to think about the ways that you can expand your income by getting a better job by doing a side hustle on nights and weekends or just starting a new business instead of thinking about how to preserve the money that you have now by skipping on your daily coffee or going out to eat. Think about how much you can make or think about how you can make so much money that your daily latte just doesn't matter in your total financial picture. Second, the latte factor assumes that you just won't spend money somewhere else. So the math behind the latte factor is pretty straightforward. But putting it into practice is not. Our brains are very hardwired to favor short term pleasure over long term results, and I think that's why most weight loss plans simply don't work. We might be super motivated to start working out and to lose weight, but then you get hungry and your diet just goes out the window. Skipping your morning latte or whatever your recurring financial expenses requires changing a habit. And it's not just a one time decision. So unless you can make the same decision every day for the rest of your working life over and over again when you're hungry and you're tired and you just want your latte, you're probably never actually going to put that concept into practice. The latte factor also assumes that you aren't going to take the money that you were spending in a coffee and just spend it somewhere else. So most people just don't have the financial discipline to live on less than they make. Even if you were to change that habit and stop having a morning latte, you would also have to make the conscious decision to take your $3.50 daily latte or whatever it is and invest that money every month into the stock market or set up an automatic investment plan to do do that for you. And honestly, if you are disciplined enough to change an ingrained daily habit in your life to live on less than you make and to set up an automatic investment plan, chances are you're probably already saving money for retirement anyway and the latte factor idea isn't really super helpful for you anyway. Third, the latte factor assumes that your daily latte doesn't make you any money. So I probably have between 150 and 200 coffee meetings a year with people that want business advice. They want to discuss maybe doing a business deal with me, or maybe they just want to catch up. Those coffee meetings foster relationship building, Which is just incredibly important in business and in one Standing in the community. Early last year I had a lunch meeting that turned into a coffee meeting that turned into three more coffee meetings that turned into me buying an apartment complex with another investor. So that was a very profitable meeting that I took. A couple years ago I had a coffee meeting that led to a business deal that led to us getting a bunch more financial data that we can use at MarketBeat. It's been very profitable for us as well. Recently had another coffee meeting that turned into an opportunity to make a business loan that was both helpful for the local business and profitable for me as an investor as well. I probably spent more than ten grand at coffee shops in the last five years, but I've earned far more from the friendships and the business relationships that I built over sharing a cup of coffee with someone, often that I'm the one paying for it. That goes for both dollars and cents, but also for kind of the non financial benefits of just being part of a community and building friendships and the simple enjoyment of a morning cup of coffee among friends as well. The latte factor does a good job of demonstrating the value of saving money over time and compound interest, but probably shouldn't be taken as hard financial advice like Dave Ramsey's baby steps might be. You know, at best, it's kind of a cheeky financial concept that encourages you to think about saving money, and at the worst, it probably perpetuates the belief that wealth is finite and needs to be preserved at the expense of your daily habit. So keep drinking your lattes or whatever your expense is. Maybe not cigarettes, but if you like going out to eat, you like having a latte, you like having an afternoon diet Mountain Dew, whatever your habit is, you probably don't need to stop it. Just think about how wealth can be abundant and how you can have so much money, how you can earn so much money that it's just not a factor in your daily living equation. Hope you enjoyed this video. Thanks for watching.
