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“Don’t buy the latte”, or “have your coffee at home, you’re wasting your money” — financial “advice” we have all heard or at least, come across on social media.
David Bach, in his best-seller “The Automatic Millionaire”, introduced the “latte factor”, which is the basic premise is that if you forego a £5 latte every morning — or any other minor pleasure you enjoy daily, such as bottled water, fast food, or soft drinks — you’ll have a lot more money to put towards your savings. Kevin O’Leary, a Shark Tank investor, shared his opinion about buying barista-made coffee: “Never do I do that. That is such a waste of money for something that costs 20 cents.”
“Save instead”
So how much would you save from not buying that coffee every day? Let’s assume your daily coffee costs £5, which adds up to £35 a week, £150 a month, and £1,825 a year. £1,825 on your account a year allows you to cover one month’s rent in London, pay for the leasing cost for your car for a few months, or enjoy a nice holiday.
Let’s assume you put the money you saved into a savings account with an APY of 0.8%, you would end the year with £1,839 — not much. After 5 years, this initial amount would increase to £1,899, which is also not a big sum — just £74 more, and very little when comparing how long it took to get there.
So, perhaps the secret isn’t to give up barista-made coffee for a year, but for the rest of your life. After ten years, the money saved equals £18,250 without interest and £18,994 with 0.8% compounded monthly interest. This will not make you a millionaire, but it will allow you to purchase a car, refurbish your flat, or pay rent for a year.
Applying this principle in times of record high inflation
In the United Kingdom, inflation climbed to 10.1% in July, a 40-year high, and is anticipated to reach 13% in October. This means that £100 a year ago is now worth £90.9. In other words, as inflation rises, the purchasing power of money falls, and the real value of savings decreases. Individuals who had saved their entire lives, for example, saw their savings practically become worthless during times of hyperinflation.
So, what will make you a millionaire?
We all know that saving money on your daily coffee will not make you a millionaire. Instead, Bach and O’Leary argue that investing the money you would have spent on unnecessary expenditures, in this case, coffees will make you wealthy.
The Standard & Poor’s 500 (S&P 500) is the largest and most important stock market index, tracking the performance of the 500 largest companies listed on US stock exchanges. Between 2010 and 2022, the index returned 10.5% on average p.a. So, what would happen if you invested that coffee money into the S&P 500?
Investing £5 every day for ten years at a rate of return of 10.5% results in £29,792, as opposed to £18,921 (assuming 0.8% interest) when the money is merely saved (disregarding inflation). That’s a difference of £10,871, or 57% more. Safe to say that investing your money puts you ahead of the curve. The next question is, how can you maximise your returns when investing that latte money? The answer is simple: with One-Signal.
One-Signal returned 26.5% on average p.a. between 2010 and 2022. This means, that after 10 years, you would end up with £65,377, as opposed to £29,792 when investing in the S&P 500 and £18,921 when saving your money.
Now, let’s look at the even longer-term:
Isn’t that incredible? Jokes aside, it appears that we have amassed a substantial sum of money by not purchasing coffee every day and instead investing the money in the stock market. The more time you do so, the more money you make — simply by compounding, which is the most important variable. The longer the time horizon, the better the result will be.
Some considerations
Our example assumes that someone spends £5 on coffee every day, which is excessive but not completely unrealistic. We all, however, have our own cup of coffee. Unlike me, you might despise coffee and never buy it. Even if you don’t buy that cup of coffee every day, you’re probably spending small amounts of money on something else regularly, such as an unused subscription or unhealthy habits that may cost you more than you realise. The latte effect is unique to each of us.
Of course, occasionally treating yourself is reasonable. The goal is not to persuade you to refrain from having coffee with friends and family for the next 30 years. Also, while home-brewed coffee isn’t bad, nothing beats the taste and experience of a professionally prepared beverage at your favourite local coffee shop, which happens to make your day a little better and is something to look forward to.
It is also crucial that you do not substitute something else in place of your coffee. Just like when starting a strict diet: you are more likely to treat yourself to a cheat meal. This mindset is also common when it comes to your finances. Buying something else with the money you saved from not getting your coffee will not help you reach your goal, just like having that cheat meal completely negates or even adds more calories than what you were trying to achieve.
One final point to consider is the personal trade-off. If giving up your daily cup of barista-made coffee is simple for you, that’s great. However, if you absolutely cannot live without it, that is fine as well. Of course, something in the middle works as well. Go for it if you prefer having that latte every morning rather than seeing it compound in the market.
Conclusion
Not buying your coffee at the coffee shop and saving the money won’t make you a millionaire. That is a fact. With record-high inflation, your money will also lose its value when being left in the bank. The best alternative is therefore to invest it, and that with something which will generate high returns.