Understanding the latte factor: Identifying wasteful spending habits

What is the latte factor?

The Latte Factor is a concept popularised by David Bach, an author. It refers to how people tend to ignore small and seemingly insignificant purchases, such as coffees, that add up to a large sum of money.

Simply put, the Latter Factor shows how spending small amounts of money regularly out of habit can cost you a lot more than you think.

Ask yourself: How much money did you spend on coffee or bubble tea last month?

Do you genuinely need coffee on a daily basis to kickstart your day, or are you buying them out of habit? Should you be curbing your craving for coffee, bubble tea, or the recently raved about rice yogurt drinks, and can the money spent on them be put to better use?

Chugging a starbucks every morning unknowingly before work puts a toll on both your wallet and your health. Assuming that you drink a $7 cup of coffee five days a week, for a year.

$7 x 5 days a week x 52 weeks a year = $1820

What if you drink a $6 bubble tea three times a week?

$6 x 3 days a week x 52 weeks a year = $936

Looks lesser in comparison? Well, how many months of utility bills can you pay with over $900? That amount is still equivalent to a luxurious staycation, and even a plane ticket to a nearby country during the sweet old pre-COVID days!

You could have paid for a few months of rent with that coffee.

How do I tell needs and wants apart?

Needs are the must-haves that you cannot survive without. They are the daily necessities that keep you sane such as food, shelter, utilities, an occasional treat, and more. Wants are things that you desire, which can be a more expensive substitute of your needs, or over-the-top splurges.

But let us fact it. Often times, you already know what you really need and what you only want. The difficulty lies in acting on your knowledge, especially when the ‘want’ is relatively cheap, like a cup of coffee.

Do you need a Starbucks? Probably not, kopi o works too.

Do you want a Starbucks on a gloomy Monday work day as a pick me up? Definitely.

This is an especially easy purchase since it is under $10.

The problem comes when you adopt wasteful habits.

Say you want to buy a new bag before starting your new job at a new firm. You decide to get a stylish luxury branded bag to treat yourself for clinching the job.

However, this does not stop there. You then decide to get a few luxury suits and shoes to complete the look. Then you decide to get a new wallet, because why not? Then you feel like treating yourself by going for a massage, and maybe a nice meal with friends.

As evident, the first splurge is not the problem, the problem is with the habit. Once a wasteful spending habit is formed, it may be hard to kick. This is why lifestyles change, and why financial goals evolve with time.

You may not want a fancy car today, but a decade down the road, will you want it?

Lifestyle needs change with time.

How can I be conscious of what I spend on?

Ask yourself some questions before deciding to buy something, no matter how ‘cheap’ you think it is.

1. How much is it?

2. Do I need it?

3. Do I really, really need it?

4. Is there a cheaper substitute that still satisfies me?

5. Will this make me happy an hour later? How about a week later?

Take your Netflix or Spotify subscription for example. You can save money every single month if you share it with your friends or family. Identify the little pockets of savings in your life and work towards magnifying them. You can also look at the 50-30-20 budget rule.

This simple yet genius concept behind the Latte Factor teaches you about the importance of controlling your spending habits. It highlights how tiny amounts of money, with time and habit, can snowball unknowingly. Use this to your benefit.

After identifying all your wasteful habits and eliminating them, save them and watch the money grow with compound interest. Alternatively, to really snowball your earnings, park them under an investment to reap bigger returns and treat yourself.

Over time, you will develop strong money management skills and a healthy wealth building mindset. These skills can bring you a step closer to financial freedom.

Budgeting is still fun.

Although it it important to track small expenses to identify and eliminate wasteful spending, all work and no play makes Jack a dull boy. Your wealth should bring you joy, but in a sustainable fashion. Prioritising both needs and wants to achieve long-term goals is the key to financial management.

Seeking the help of a trusted financial advisor can complement your budgeting efforts by managing your overall wealth to help you achieve what you want. Life First Advisory provides a non-obligatory consultation to see what help you need to reach your life goals. Our advisors can work with you to customise the best financial solutions to best achieve what you desire in various life stages. After all, goal-based investing is one of the most motivating investment methods.