Can $5 be enough for you to retire on? Of course not. That’s ridiculous.
But – take that $5 you spend every day on small expenses – and invest it early on in your life – and you could have a half-million dollars by the time you’re ready to retire. For just five dollars a day. It’s not complex or magical. It’s basic math.
That’s the concept that David Bach popularized in his books, “Automatic Millionaire” and “The Latte Factor”. Small and automated micro-investments can turn into big dollars for retirement.
How the calculator works
Plugin your expense amount – $5, $10, $20 or whatever it is – and market rate (8% is the average assumption), and you’ll see what that invested amount looks like if you spend it daily, weekly, or monthly.
Play around with the numbers, and consider your real-world habitual spending habits. With $5 a day, you’ll have over a half-million dollars in 40 years.
What if you started carpooling to work? That’s a few more dollars in gas savings that you could use. What about buying generic instead of name brand household products? There’s a few more dollars.
You can go from saving $5 extra dollars a day to $10, $15, or $20 a day just by making small simple choices on what you spend your money on.
What the latte factor focuses on
The genius behind the click-baity name is the automation of small amounts of money plus compound interest.
Latte sounds fairly pretentious, but the key is to figure out what “latte” means to you. Replace “latte” with “gum” or “lottery tickets” or “gas station soda” or any of those small impulse items you buy when you’re cashing out of a store.
The idea is that while $5 or $10 alone can’t do much, over time it definitely can add up. Small expenses pile together. Then you add the awesomeness of compound interest.
Why investing is a better use of your money
Compound interest is what allows you to retire. If you just saved $5/day for forty years – no interest – you’d only have $73,000. That’s definitely not enough to live off of.
But, add in interest, and your saved money starts working for you. Interest on your money accumulates while you are eating, sleeping, working, and just living your life. That interest adds to your money pile, and then even more interest is gained on that new amount. It compounds. That’s how $73,000 can go to over $500,000 in 40 years.
The best advice? Make it easy by automating your investing. Make it so simple that you don’t even have to think about it. Try an automated investing service that takes your small change and invests it for you.
Acorns
Perfect for beginners, Acorns is a spare-change investment app that rounds up every expense you make with a linked debit or credit card.
Start with just $5 and pay as little as $3 a month in fees (depending on your plan). You can pick your portfolio style ranging from conservative to aggressive, so you never have to take on more risk than you’re comfortable with.
» MORE: Check out our full review of Acorns.
Stash
Also great for beginners, the Stash app allows you to have more control and easily pick the companies you want to invest in.
Stash breaks whole investments down into smaller, more affordable pieces called fractional shares. That means, even if you don’t want to pay a ridiculously high price to invest in stocks like Netflix or Disney, you still can! All you need is $5 to start.
Other small expenses to cut
Cable
Millennials have been bucking the trend of subscribing to cable tv for years now. But, if you’re still spending the money on it, ask why you’re doing it and what you can do to reduce cost. It just might be a habit. Try cutting it for a month. You can always get it back if the separation is too painful.
If there’s a particular show or sport you like, consider splitting the cost with a friend or only getting cable for the length of the sport’s season. Look into live streaming services likeSlingTV or buy an antenna to get local channels.
The best news with this expense is there are a lot of options beyond traditional cable that can save you a bit of money every single month.
Going out for lunch
It’s incredibly easy to fall into the habit of buying lunch every day at work. Almost no matter where you go, it’s $10 a meal, and costing you $50 a week. Yeesh.
Try to get ahead of the peer pressure of going to lunch with your friends. Organize a “bring your lunch to work day” once a week with your coworkers. Get away from your desk and eat in a conference room or outside if the weather is nice.
Cell phone
If you have to be with the big guns, AT&T or Verizon, a family plan of three or more people is the best way to save money. Of course, this only works if everyone pays their share of the monthly bill on a family plan. Otherwise check out a no-contract phone plan at Ting, Cricket, or Red Pocket Mobile just to name a few.
Monthly subscriptions
Spotify. The New York Times. Netflix. Amazon Prime. Individually, all of these subscriptions are just a few bucks a month. But if you’re not using them, they’re costing you a lot of money over time.
Reflect on your habits. Even if you go through months or seasons without watching Netflix or listening to Spotify, unsubscribe! If you feel like you’re missing out, then you can always resubscribe.
Summary
Does this mean you need to stop drinking your favorite coffee? No. Let’s repeat: NO. This is the most incorrect presumption about the latte factor. If you love your daily coffee, keep drinking it!
Instead, think about all the other things that you don’t love so much and are keeping because it’s a habitual expense. Cut what you hate, keep what you love, and invest the difference.
» MORE: Head over to our list of the best robo-advisors for a simple way to invest without managing it yourself.
As someone deeply immersed in personal finance and investment strategies, I've encountered various approaches to building wealth and achieving financial independence. The concept highlighted in the article revolves around the power of small, consistent investments and the magic of compound interest. This philosophy has been notably championed by financial expert David Bach in his bestselling books, "Automatic Millionaire" and "The Latte Factor."
The core idea here is that seemingly insignificant daily expenses, when invested wisely and early in life, can lead to substantial wealth accumulation over time. This isn't a complex or magical formula; it's grounded in basic math and the principles of compound interest. David Bach's "Latte Factor" encourages individuals to identify and redirect small discretionary spending, automating the process of converting these funds into investments.
The calculator mentioned in the article is a practical tool designed to demonstrate the potential impact of consistent, automated micro-investments over the long term. By inputting your daily expense amount and assuming an average market rate (8% in this case), you can visualize how these investments could grow if made daily, weekly, or monthly. It serves as a wake-up call, urging individuals to reconsider their spending habits and make intentional choices that can lead to a more secure financial future.
The article emphasizes the genius behind the "Latte Factor" concept, which lies in the combination of automating small amounts of money and leveraging compound interest. The term "latte" is used metaphorically to represent any small, habitual expense that, when scrutinized and redirected, can contribute significantly to one's financial well-being. The article rightly points out that it's not about depriving yourself of things you love but about identifying and cutting expenses that are more habitual than enjoyable.
Furthermore, the article introduces the crucial role of compound interest in wealth creation. Without interest, saving $5 a day for forty years would result in only $73,000—a far cry from sufficient for retirement. However, with the power of compound interest, that sum can grow exponentially, turning $73,000 into over $500,000 in the same timeframe. The key takeaway is that investing is a superior use of money compared to mere saving.
To make the process more accessible, the article suggests automating investments through services like Acorns and Stash. These platforms enable individuals to invest spare change or small amounts regularly, taking advantage of fractional shares and diverse portfolio options. The emphasis is on making investing so seamless that it becomes a natural part of one's financial routine.
Additionally, the article provides practical tips on cutting other small expenses, such as cable subscriptions, eating out for lunch, and unnecessary monthly subscriptions. By making conscious choices and redirecting the money saved, individuals can accelerate their journey toward financial security without sacrificing the things they genuinely enjoy.
In summary, the "Latte Factor" concept is a call to action for individuals to reassess their spending habits, identify discretionary expenses, and redirect those funds into automated investments. Through the power of compound interest, these small, consistent contributions can lead to substantial wealth accumulation over time, providing a more secure financial future.
