The Latte Factor |
Credit: discovercoffee.co |
What is the Latte Factor?
• The Latte Factor is a concept under personal financing which highlights how small sums of money consumers spend on a regular basis cost far more than anyone can imagine!
• The low basket size of daily use products entices consumers to make repeat purchases unconscious of the fact that in totality this purchase pattern amounts to a mammoth-sized expenditure.
• This is also applicable to luxury brands and not just daily-use products. Any money spent on periodic, regular spending qualifies as the latte factor.
Understanding The Latte Factor
• This term was coined and popularized by David Bach to represent small purchasing habits. It was derived from latte coffee as daily coffee purchases are a prime example of unconscious spending which adds little value consumers' lives. to
• Bach explains that if consumers add up the frivolous costs incurred in their daily lives, and instead save and invest it, they could build their wealth at a significantly faster pace.
• It encourages consumers to make smart buying choices and forces people to weigh their needs against their wants by focusing more on getting a greater value.
• The latte factor calculator shows consumers the reality of the foregone earnings of their money which could have compounded over years. This foregone interest indicates the lost opportunity to increase the INR 10 to 20, 100, 1000 and further by saving and investing instead of expending.
• The concept sheds light on the opportunity cost of the daily expenditures that consumers undertake. While a rupee spent today may seem microscopic in the larger scheme of things the same will generate a larger return, a multiplier effect we cannot ignore!
What does the concept highlight?
• Power of compounding of interest on money invested instead of spending
• Growth of returns over a significant time i.e. invested money kept as is over long periods of time
• Returns on investment increase our wealth be it 1% or 10%
• Healthy spending habits avoiding indulgences expenditures daily
• Controlling our finances or personal finance management
• Finally, the importance of small amounts of money
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