Does the 'latte factor' really work?
According to the “latte factor” theory, you give up your daily fancy coffee or similar indulgence and invest the money you would’ve spent. Over time, your small sacrifice becomes a small fortune. But does it work in practice? Well, yes, but you’d need to start pretty early to make a sizable difference to your nest egg.
Say that a 25-year-old starts saving $5 a day ($35 a week) at an annualized interest rate of 5%. By age 65, this individual will have accumulated almost $230,000 thanks to disciplined saving and compound growth. For some people, this strategy is a worthy venture. Others may prefer to enjoy 40 years of sipping lattes and socializing with friends and colleagues.
You can also look at the latte factor less literally. Keep life’s little pleasures, but save in other ways. Comparison shop. Choose the next best model. Ways to save will present themselves when you’re on the lookout to economize. The key to success, of course, is making the most of what you save by investing wisely.