How the pumpkin spice ‘latte factor’ is stopping you from getting rich

I bought my first pumpkin spice latte of the season last week and it cost $10 with tax. So I sipped it slowly and enjoyed all that overpriced cinnamon, clove and nutmeg flavour to its fullest. It was delicious. I had a smile on my face the whole time I drank it. But I’m not buying another one until December; I’ll stick with my regular homemade drip coffee till then.

It got me thinking about “The Latte Factor” term that was popularized by financial author David Bach back in the early 2000s. The concept in personal finance illustrates how small, everyday expenses can add up over time, impacting your overall savings and financial well-being. If only he’d known how expensive lattes would become two decades later!

Unlike some old-school restrictive personal finance concepts that don’t make sense for people today, I happen to think this one might be more relevant now than ever.

Here’s the scoop on how it works, and a few tips of my own to make it your own, if you want to try it out.

The big idea

It starts with the idea that if you spend, say, $10 on a daily latte (or any similar small treat), that doesn’t seem like much in isolation — it’s just a little indulgence, right? — it really adds up over time. 

The monthly impact of $10 per day is simply taking $10 and multiplying it by 30 days in a month, which means you’re looking at $300. Over a year, that’s $3,600! Suddenly, that daily treat feels more like a hefty expense. 

This is the part where readers often say, “But who actually does this?”

Lots of people. 

You see evidence of it in our current debt polling in Canada, and in retail consumption numbers.

I was doing a radio interview recently and it was a call-in show where people ask for financial advice and I dish it out like popcorn. In that hour I had two callers fess up to their annual spending at coffee shops. One woman was on track to close the year having spent $4,400 at Canada’s favourite coffee shop (I’ll keep the brand out of this, but you can guess).

The other caller had already spent $5,800 this year so far, at a leading coffee shop competitor. 

The thing is, it’s not just lattes that add up. It can be micro purchases online, impulse buys coming home from work and more. Step back for just a moment to think about those small buys that don’t seem like much right now. I suggest to my readers that they review their credit card and bank statements (also the transactions in the fast-food apps), to see if any micro spending might be happening. If it is, ask yourself, “Is this really worth it to me?”

The real kicker is the opportunity cost

What else could you do with that money? That’s the big question.

What if you invested that $10 per day instead of buying a pumpkin spice latte? What if you started doing that today? With compound interest and reinvested returns, it could grow significantly over time. Investing it in a TFSA or RRSP could mean tens of thousands of dollars, even hundreds of thousands, by the time you retire. Prioritizing that $10 a day into the new First Home Savings Account could make it possible to build a down payment that much faster.

Here’s a scenario to consider. Let’s say you’re 30 years old, read this, and decide to trade in your latte habit to start investing. $10 per day invested at a rate of return of 7.5 per cent until retirement at age 65 would result in a $610,000 nest egg. Wow! Even if you invested half, so $5 per day, it’s still hundreds of thousands of dollars toward your long-term savings. 

If you want to see what your habit will potentially cost, a compound interest calculator is a great way to drive home the numbers. You’ll get to see how easy it is to ingest your retirement savings, one sweet latte at a time.

On that note, habits are everything

If you’re connected to social media in any shape or form chances are you’re well aware of the newish mindful-spending trend. The Latte Factor is a classic example of mindful spending in action. It encourages people to examine their daily habits and recognize where they might be overspending on little luxuries and on little things that, upon personal reflection, might not be worth it. 

My take is the latte factor isn’t about eliminating all treats — that’s a deprivation strategy and humans just don’t do well with that approach long term. It’s about being mindful and making intentional choices that align with your financial goals like buying a home, saving for retirement, helping your kids or eliminating debt. Creating habits to support those goals is what will lead to financial success.

As with most things in life, the idea is to strike a balance between enjoying life and the occasional latte and saving for the future. Heck, maybe you opt in for a homemade version of your favourite treat, and enjoy it while you watch your investments grow? 

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star