Small habitual spending done consistently can put a large dent in your finances over the long term
Latte Factor Calculator is designed to show you just how much you are spending on a small habit, and how much it adds up to over time
Most of us have that one small habit or guilty pleasure that we just can’t quit. Whether it is treating yourself to a cupcake from your favourite bakery every few days or catching a movie every weekend, the supposedly small spends can add up really fast. Many people don’t provision for such spends simply because they don’t consider them big enough, but in reality, small habitual spending done consistently can put a large dent in your finances over the long term.
American financial author David Bach coined the term “latte factor" to refer to this spending habit. The name refers to the daily habit of buying a cup of coffee before work that many Americans have. The fact that popular chains like Starbucks have established a firm footprint in India is a testament to the fact that this trend is now fairly common here too. According to Bach, the ₹200 you spend on a steaming cup of coffee before work might seem like it’s worth it, but it is slowly and steadily making a dent in your savings over a 10-20-year period. “The small, daily amounts add up to extremely large sums over time that defies intuition," said the website dedicated to the Latte Factor Calculator. The calculator is designed to show you just how much you are spending on a small habit, and how much it adds up to over time. The same amount, when invested, would not only compound to a significant amount, but would also regularly earn interest.
But the logic of the calculation has been criticised by some experts, who argue that Bach’s assumption that a person spends $4 on a latte every day is flawed to begin with, and that his projections are based on an interest earning of 10-11% which is too optimistic. Counter arguments have also been made, most famously by Bach himself, stating that the latte factor is just a metaphor designed to understand how habitual small spends can add up and that the money can be better utilised by breaking such habits.
More recently, the same phenomenon was highlighted and put in the millennial context as “the avocado toast problem". Tim Gurner, an Australian developer said in an interview that he thought most millennials were unlikely to ever be able to buy a home because they were spending too much on gourmet food and beverages. This met with widespread criticism because Gurner ignored rising costs, a tough job market and a number of other factors.
Whether your vice is coffee or avocado, it’s a good idea to keep a tab on unconscious spending, especially if you often find yourself wondering where all your money is going.