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Earlier this year CNBC published an article titled, Suze Orman: If you waste money on coffee, it’s like ‘peeing $1 million down the drain’

Here is a quick excerpt from the article:

“Let’s say you spend around $100 on coffee each month. If you were to put that $100 into a Roth IRA instead, after 40 years the money would have grown to around $1 million with a 12 percent rate of return. Even with a seven percent rate of return, you’d still have around $250,000.”

“You need to think about it as: You are peeing $1 million down the drain as you are drinking that coffee,” Orman says. “Do you really want to do that? No.”

What Suze Orman is referencing here is known as the ‘Latte Factor’ made famous by New York Times bestselling author David Bach.

Being cognizant of the small purchases in life and how they can lead to wasting substantial sums of money is IMPORTANT. Especially for someone just starting their personal finance journey and looking to build a solid foundation. However, to achieve meaningful wealth I don’t believe the “latte factor” is ultimately going to move the needle (unfortunately).

The major purchases in life such as a car, home, and education have opportunity costs that are worth a lifetime of latte purchases. So while I respect the principles of the latte factor, I don’t like the hyperbolic examples used by personal finance ‘gurus’ to draw attention to unrealistic examples.

More specifically, I REALLY don’t like the example used by Suze Orman in this article. A 12% annualized return is well above the long term average for US stocks and would be extremely unlikely to be achieved even by professional money managers. As you can see, the rate of return (over a 40 year time period) has a MASSIVE impact on the ending dollar amount.

The ending dollar value also doesn’t account for inflation! When you use realistic numbers that account for REAL returns after inflation, this example quickly loses its ‘clickbait’ appeal.

If foregoing coffee purchases aren’t going to move the needle, what will? 

Again, assuming you are aware of and respect the latte factor, here are some things that have an opportunity cost that surpasses a LIFETIME worth of latte purchases:

  • Failing to plan for tax efficiency within your income and investments
  • Not maximizing lucrative employer stock compensation (such as options and purchase plans)
  • Failing to take advantage of 401(k) matches
  • For business owners – failing to reduce taxable income via retirement plans and available deductions
  • Overextending yourself on a home (residence) and/or viewing it primarily as an investment
  • Taking out student loans for education without a reasonable return on investment
  • Not discussing finances with your partner, which can ultimately lead to divorce

To really benefit from compounding interest with REALISTIC rates of return it requires a high savings rate. The ‘easiest way’ to achieve a high savings rate is by increasing your income. Foregoing the $5 latte will give you a great foundation, but will not ultimately move the needle (like increasing income will).

Don’t ever sell yourself short! Your earning potential is usually much higher than you think. Be cognizant of the small purchases but focus on getting the big-ticket decisions right.

Tune in to the DO MORE WITH YOUR MONEY podcast below to get my complete thoughts!

Available on Spotify, Apple Podcasts, Sticher and SoundCloud

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