If you read books and websites about personal finance (especially topics like early retirement, financial independence, etc.), you might have seen articles about how much money you can save by consistently saving on little things, like your daily coffee. One personal finance guru has an online calculator.*
Then there are others who say don’t sweat the small stuff and focus instead on the big things; instead of trying to save money on by modifying your coffee habit, try to save money on your house and your car.
First, I want to point out that you need to be careful how you calculate how much you will save. I’ve heard or read statements like, “Coffee at the Starbucks costs $2.70. So make your own and you’ll save $1,000 per year”. How did that $1,000 get calculated? It looks like they took $2.70 per day and multiplied by the number of days in a year, $2.70 × 365 is $985, and then rounded to $1,000.
What’s wrong with that savings of “$1,000”?
- Can you produce coffee at home for free? If not, then your daily savings aren’t going to be equal to the cost of the coffee you buy away from home. Coffee made at home costs something. Your savings will be the cost of the away-from-home coffee minus the cost of made-at-home coffee. Let’s say $1.00 is the cost of the made-at-home coffee. If so, then your savings are $2.70 – $1.00 = $1.70. You savings will equal the cost of away-from-home coffee only if you give up coffee completely.
- Do you really buy away-from-home coffee every day of the year? If you only buy one cup of coffee on days you work, and you don’t work every day of the year, then you probably don’t buy coffee more than 250 times per year. (That’s 5 days a week × 50 weeks per year.) Of course, if you buy coffee twice a day, …
- Does the coffee at Starbucks really cost $2.70? If you order something less expensive, you’re annual savings aren’t going to be less. (On the other hand, yes, if your coffee costs more than $2.70 per day, then you can save more.)
Don’t get me wrong! I still think that you can save a significant amount of money by avoiding convenience and doing as much DIY as possible, but it’s also important to do our calculations honestly and make sure our expectations are in line with reality.
Second, there are some people who say that they give up the away-from-home coffee, but they don’t see the savings. Problem is, there are so many other expenses. Some come irregularly or change from one month to the next. It’s personal finance chaos! The made-at-home coffee savings signal gets drowned out among all the financial noise from all the other expenditures. This, however, doesn’t mean that there are no savings. There are. It’s the accounting that is the problem here. If you’re actually spending $1.00 per day instead of $2.70, then you need to take control of that money and ensure you don’t spend it on something else. Take that daily savings of $1.70 and literally put a dollar and a few quarters in a jar every day. Or move $8.50 from out of checking and into your savings account each week. Whenever you’re developing new habits to save money, you need to really save that money. Be careful not to let it just sit around telling you to spend it on something else!
Now that we’ve taken care of that …
The “Latte Factor” is one presentation of the little-things-add-up-to-big-things philosophy. “Watch the pennies and the dollars will take care of themselves” is another way to say it. This way of thinking has plenty of proponents, myself included.
As mentioned above, you’ve probably also seen articles about how much you can save on the big things. At least one expert says, “forget all that little stuff, I’ll show you how to do big things and once you do them you won’t need to worry about the little things” [my paraphrase]. Save on the big things, and you won’t have to worry about the little things, the thinking goes.
So, we have a debate: Which is better? Saving money by consistently reducing or eliminating spending on a small purchases (e.g., fancy coffee like latte that you might purchase 200 to 250 times per year) … or … saving money on a big purchase (e.g., a car or your house that you might have only several times in your life) and the semi-big expenditures like cable television, telephones, and credit-card interest?
Well, it seems to me, it’s not an either-or proposition. There’s no reason you can’t save on both the small things and the big things. In fact, in my opinion, saving on the small things is good training for saving on the semi-big and big things. Kind of like in professional sports, start in the minor leagues and then move up to the majors. It reminds me a bit of the sentence in “The Richest Man in Babylon” where Arkad says, “If I set for myself a task, be it ever so trifling, I shall see it through. How else shall I have confidence in myself to do important things?”
Set yourself the task using your habits of frugality, efficiency, and economy to save money on the small things and you’ll find you can also save money on the big things.
* I’ve experimented with the calculator at http://davidbach.com/latte-factor/ and have found that the weekly and monthly calculations do not match (aren’t even close) to results I get with other online compound earnings calculators. However, the daily calculations are consistent with other results.