Everyone who talks about budgeting beats up on Starbucks and people who just want a damn cuppa coffee to help them get through their long, long day.
Poor Starbucks. Poor Latte Drinkers. I get it. I live in Seattle, where we love coffee, we love Starbucks, and mostly we love to pretend to hate Starbucks but then go there anyway. Coffee in Seattle is kinda like Church in Salt Lake City or Birmingham – you just don’t trash talk it.
Some of my readers, when I announced No Spend Month October by suggesting you could skip the latte and pay off your house were a wee defensive of the coffee habit. “Lay off my latte!” “Stop picking on lattes!” “Coffeeshops employ people!” “I have a kid I need my coffee break!” were a few of the understandable reactions from readers.
I get it. Me and my pot-of-homemade-coffee-a-day habit get it. Truly. No one on this blog is going to try to talk you out of caffeine.
All I ask, if you are white-knuckled as you read this, gripping the little paper sleeve around your mocha ever tighter and anticipating the rage that will fill you when yet another jerk tells you to give up your one…teeny…thing, the only thing you do for yourself….all I ask is that you finish your coffee so you don’t get a headache, and then hear me out.
The reason Starbucks gets such a bad rap is because a financial writer named David Bach (author of the hugely successful Finish Rich series of books) coined the phrase “Latte Factor” to describe how small daily or weekly expenditures add up to big sums over time.
Bach, in his books and seminars, politely smacked people out of their habituated belief that a $4 or $10 a day latte habit wasn’t much money by showing them what that same amount of money can do if given room to grow and compound and breed more little dollars.
But, this is not about the latte.
This might be about the latte, or it might be about the thrift store indulgences, or the mascara, or the iPhone Aps, or the garden store purchases (ahem, cough, cough) or the daily $7 lunch out, the weekly mani/pedi, the extra sleeve of Titleist Pro V1s every month, the Friday happy-hour cocktail, the extra bag of black oil sunflower seeds for the chickens or the weekend long-drive that burns $20 of gas.
Only you can assess what your little Money Leaks are, and only you can decide if those leaks are worth keeping. That’s where your values come into your spending.
But before you decide if the proverbial (or literal) latte is worth it, when measured against your spending values, you have to find out what it’s really costing you.
Today’s Mini-Money Challenge
Go to David Bach’s “Latte Factor” calculator to determine the true cost of those little treats you enjoy. Just pick one little Money Leak and factor it out. I recommend using an interest rate of 8% when you do the math – this is a typical, long-term average return for investments.
If you want a very conservative, worst-case-except-Zombies estimate of what kind of returns you might expect if you invested that money instead of spending it over 20 or so years, use 4%. This is a bare minimum of what your must-have little treat is costing you in opportunity cost.
“‘Opportunity Cost?’ I thought it was Latte Cost?”
In simple terms, opportunity cost is a fancy way of saying “ways you didn’t choose to utilize your resources, but could have if you’d made different decisions.” Opportunity cost isn’t just limited to money, it can apply to any limited resource: time, land, anything which, when used, tends to precludes alternate uses.
So, for example, the opportunity cost of growing a big garden is not having room for a pool. The opportunity cost of watching a two hour movie is the additional sleep you did not get. The financial opportunity cost of a $7 pack of cigarettes every day is whatever else you could have spent that money on, including savings. (There is another opportunity cost in health if you’ve got a pack-a-day habit, but that is slightly harder to quantify).
Just let “opportunity cost” sit with you for a second and allow yourself to own the fact that you are choosing to spend on your Money Leak. No one is making you choose latte or new shoes or golf balls or tomato starts over savings or a new bathroom or a paid off house or an iPad. These are your active decisions. You control them – isn’t that a powerful feeling?
So go look up what your little daily or weekly Money Leaks are really costing you over 10 or 20 years and then come back and lets talk about it.
(EDIT: several readers have let me know about security warnings that occur when they attempt to access the Latte Factor Calculator. While I have not encountered this, you can use this alternate calculator, enter the weekly amount your Money Leak costs and other relevant info and get the same info.)
You may look at the opportunity cost of a daily latte and pumpkin cream cheese muffin and decide that cost is completely within your spending values because $7 is how you buy yourself a few hours of peaceful, productive time every day. Or, you might be a little horrified that you just spent your kid’s college education and 640 calories a day on something you barely notice.
Let us know in the comments: what is your Money Leak? Are you just fine with your Money Leak spending or kinda shocked? Is that expense totally worth it for you? If so, awesome, it sounds like you are spending your money in accordance with your values! If not, what action will you take to plug that leak and to what will you apply your savings?1