A few years ago, a personal finance “guru” coined the term “Latte Factor.” The basic premise is that small expenses add up and by simply cutting out your daily latte, you could be saving thousands of dollars each year. Then, you just invest that money instead of spending it on your daily coffee and voila! You’re rich. (Well, okay, not rich, but you have a good amount of money.)
If only it were that easy.
First off, I don’t know about you, but I certainly don’t drink a fancy coffee every day. I don’t go out to lunch every day. I make my coffee or tea at home. Sometimes I participate in the office coffee club, where 50 cents buys me a cup of coffee with whatever extras I want (creamer, sugar, fancy syrups, etc). Of course, I drink my coffee black, so this isn’t really a bargain, but I appreciate that it exists. Most days, I also bring my lunch to work. I eat out on occasion (lately, more than I probably should), but it’s a treat, not a regular occurrence.
People reading personal finance books, blogs, or forums have probably already figured out that hey, maybe spending $100 a month on coffee isn’t worth it.
Or maybe it is.
I am a firm believer that every budget needs a bit of fun money. It doesn’t matter what sorts of debts you’re paying off. Even if you’re living paycheck to paycheck. You need to set aside a small bit of money for something fun.
Now, that may not be $100 in coffee. Maybe it’s $1.50 a week to rent a movie from Redbox. Or $20 a month to spend on downloading music. Something small to treat yourself.
Why do this? Because if you only spend your money on requirements and never ever splurge on anything “just because,” you’ll end up busting your budget with a big “just because” purchase. It doesn’t matter how strict you are on your budgeting. Pretty much everyone ends up doing it. Maybe not right away. Maybe you can make it a few months without any fun expenses. But sooner or later, it’s going to catch up with you. And you’ll think “Well, I haven’t spent any extra money in three months, so I can totally afford to buy this $100 thing.”
Except that you didn’t budget for that $100 thing. So now you’ve busted the budget and have to figure out where that $100 is coming from.
If you just factor in a small amount to spend on yourself, on whatever you want every single month, you’ll find you’re in a better place, both mentally and financially. Maybe you just give yourself $25 a month to spend however you want. You can save it til the next month, but that money isn’t for bill paying or debt reduction. It’s for fun.
And maybe for you, that treat you give yourself is a trip to the local coffee shop with your coworkers every work day or a few times a week. Maybe you shouldn’t get that $5 frappuccino every trip (not only will it hurt your wallet, that will destroy your waistline), but maybe those daily coffee trips are important to you and bring a smile to your face.
Cutting unnecessary expenses is a good thing. But when budgeted properly, those small expenses can also be what helps you keep your financial health and your sanity in check. So maybe the latte factor isn’t all it’s cracked up to be.