The Latte Factor: Getting Rich by Cutting Out Coffee (Not!)

  • by
The Latte Factor

This post may contain affiliate links. See disclosure page for details.

The Latte Factor & The 3 “Secrets” of Financial Independence

The FI community curses the latte factor as a reason for not being rich. Also, many discuss the latte factor without the underlying concepts mentioned. Thus, the latte factor is an example of a daily expense that grows exponentially when invested.

Through a third-person narrative, Bach mentions 3 “secrets” to financial independence. These secrets are paying yourself first, making it automatic, and living a rich life now.

The FI community often shares these concepts, I believe, without realizing they are underlying systems of the latte factor. The underlying systems being the 3 secrets above. For instance, many who reach financial independence follow and teach these 3 “secrets. “

Zoey (the main character of the narrative) is never told to actually cut lattes from her daily life. The latte is a metaphor for Zoey to be more conscious of her spending habits. Henry, Zoey’s mentor, is actually the owner of the coffee shop. Zoey assumes Henry is just a barista when introduced. Henry never mentions cutting out the lattes when mentoring Zoey.

To quickly summarize the book, Zoey is taken to meet Henry by her boss. Zoey learns about the 3 “secrets” and other FI conceptions (mentioned later in this article) from Henry and a few of Henry’s friends. Later in the book, Zoey incorporates these concepts to reach financial independence.

Paying Yourself First

Bach mentions the history of the United States tax system. People were not saving to pay their taxes. The government created budgeting and other programs to help people save. However, the government made paying itself first a priority.

The metaphor often used is your taxes being paid right off the top. Bach mentions investing in an employer-sponsored plan to reduce your tax burden and for compound growth.

Making It Automatic

Digital times make automation simple. Many online (and physical) banks offer automatic transfers and bill pay. For example, most employers that offer retirement plans allow automatic investing. Pay yourself first to automatically in addition to avoiding decision fatigue.

Living a Rich Life Now

I often quote the idea of Slow Fi by the Fioneers. Slow Fi is analogous to living a rich life now. Likewise, Slow Fi is incorporating your retirement “plans” into your current life.

The Latte Factor & FI Concepts

In particular, the book mentions several underlying FI concepts. Freedom and why one would want to achieve financial freedom. Also, lifestyle inflation, consumer debt, sinking funds, hidden millionaires, and many others. My favorite concept, especially mentioned, is talking about money with others. Zoey wouldn’t have focused on her future if she hadn’t talked with the coffee shop owner.

Criticisms of Cutting Out Lattes

Keep in mind, Zoey’s background. She worked for a travel magazine and mentioned she had been through at least one promotion. Although she had student loans and credit card debt, no mention was made to her health. Her transportation costs were for trains and her living expenses were briefly mentioned. Bach does not make any mention of struggles to pay expenses on time.

For those struggling with healthcare, transportation, emergencies, and daily expenses, cutting out daily lattes doesn’t work. Luxuries are few and far between most likely. Therefore, discounting the latte factor in this manner is agreeable. But those struggling can still benefit from the 3 “secrets.” Those struggling still would benefit from paying themselves, even in very small amounts if possible.

My Analysis of The Latte Factor

Compound growth over time, even in small amounts, can lead to large sums. My analysis is that Bach is trying to teach a few concepts. Small amounts increase over time. Spend based on what you value. Avoid lavish lifestyle inflation.

To me, the latte factor is not cutting out the latte. Zoey found freedom for the cost of her latte. She learned to track and manage expenses. Of course, she found what she really desired was freedom to live a rich life now. The latte factor was the metaphor for Zoey being open to learning the underlying principles of financial independence.

Daily Spending

Zoey’s mentor broke down some of her $30 daily spendings that included the below:

  • $7.25 on her morning coffee and muffin
  • $7 for mid-morning juice
  • $14 lunch
  • $1.50 afternoon bottled water
  • $4 afternoon latte (on occasion)
  • Train ticket (they discussed this as non-negotiable and is not included in her total spending)

Cut The Excess

He didn’t even mention that Zoey needed to cut all these things out. He mentioned just making a few changes. Zoey mentioned she could cut the occasional second latte since her work offered free coffee. Zoey also mentions that she was gifted an espresso machine that she had never even used!

She could skip the bottled water as well. If she just brought her lunch in a day or two each week would be almost cutting a whole day’s spending out for the week. The juice could be cut a few days a week as well to get her a full day of savings back.

One other thing Zoey needed to work on was paying off her credit card debt. She was losing money to late fees and interest. We in the Financial Independence community hate excessive and unnecessary fees. Part of the “latte factor” is cutting out credit card interest and other fees! She mentioned all the cable channels she was paying for that she didn’t even watch. There was excessive unnecessary spending that Zoey had, that wasn’t bringing value to her life.

Wrapping It Up

In order to help those who are struggling, we need to remove the idea of cutting something important. The FI community needs to help those find their why of FI, the real latte factor. The missing piece that allows those struggling to build skills and increase income. How to avoid lifestyle inflation. We need to teach the underlying concepts of FI and the 3 secrets. Pay Yourself First, Make It Automatic, and Live a Rich Life Now.

Is the latte factor more than just cutting out coffee? Do you agree with the 3 “secrets?” Are you living a rich life now?