Before entering college I never believed that the “broke college kid” stereotype was real. You know, a person who eats a lot of ramen noodles and wears their underwear three days in a row to avoid paying for laundry. Yet, one January afternoon during my freshman year, there I found myself; wearing a sweatshirt that smelled like doritos, munching on raw ramen, and drinking water from the bathroom sink to wash it down.
Now, as proud of myself as I was in that moment, I decided I needed to take a hard look at my budget and figure out some ways save some money. I thought of a few ideas: start an Etsy account, donate plasma, become a dog walker… I was even prepared to steal aluminum cans from every recycling bin on campus and trade them for nickels. But then I remembered something my dad told me about: the latte effect.
The latte effect (or Latte Factor) is a concept from the book Start Over, Finish Rich by David Bach. The book introduces the Latte Factor as “a metaphor for those unnecessary ‘little’ expenditures that we waste our money on, without realizing how much they add up to” (finishrich.com). Bach named his concept the Latte Factor because a small, four dollar latte appears to be a small expense, but if you purchase a four dollar latte every morning before work, you will have spent $1,040 by the end of the year.
And this doesn’t just apply to coffee; your own personal “latte” factor could be anything going out to eat instead of cooking at home, spare change that you lose in your car, cigarettes, etc. But no matter what poison you pick, the truth remains the same: we could all save a lot of money if we cut back on our seemingly insignificant consuming habits.
The other day I witnessed my younger brother discover the power of the latte effect. We stopped at the bank before heading to Target so I could withdraw some cash and so he could cash in the collection of coins he had been accumulating for the past couple months. The jar was heavy; I predicted that he had about twenty dollars, and he predicted fifteen.
Guess which one of us was right?
Well actually, neither of us! The coins added up to $92.84! Who knew that the random pennies and dimes we find in our pockets, desk drawers, and cupholders could add up so quickly?
So, what now?
I challenge you to take a look at your spending history and recognize what your latte factor is. Then, using David Bach’s Latte Factor Calculator, figure out how much you spend every year on that habit. Ask yourself: Do I really want to spend that much money on my habit? What else could I be spending this money on? How much would I make if I put this money in the bank and let it accumulate interest? Once you recognize your habits as a consumer and assess the impact those habits have on your budget, you have the power to make a change.
And who knows? A year from now, you may find yourself with hundreds maybe thousands of extra dollars in your pocket.
(To find out how much money you could save by eliminating your “latte” factor, go to www.finishrich.com.)