Have you read about the Latte Factor? Generally, it’s a way of referring to the power of compounding interest. Spend $5 today on coffee instead of making a deposit into your Roth IRA account and you’re wasting precious time and money. Spend $5 on coffee today and get a coffee. Transfer $5 to your Roth IRA and get way more money in the future.
I’m not suggesting that if you consume lattes daily, you are spending frivolously since I don’t know what you consider to be frivolous spending.
Related: Why the Latte Factor Matters
And maybe you aren’t a frivolous spender. If so, congratulations! You need to celebrate mastering personal finance. Abandon this blog post immediately. 🙂
In this article from Modest Money, the latte factor of your life could be represented by actual, barista-brewed lattes. The latte factor could also be represented by going to restaurants or eating lots of candy out of boredom (I can definitely identify with both of these). Becoming Minimalist features eight different areas that could be considered latte factors. To summarize, the latte factor is something you think you overspend on, something you know you could cut back on and yet, still make it through the day/week/month/year relatively unscathed.
Basically, the latte factor is something you think you overspend on, something you know you could cut back on and yet, still make it through the day/week/month/year relatively unscathed.
Spending a little bit of money on small things adds up, no doubt. Purchasing a latte each weekday could amount to upwards of $100 each month in my area–that’s a lot of money. But what if we looked at larger line items in our budget? What if we also appeal to emotion instead of logic?
Enter The Headache Factor
Now, I think I’ve made up this concept, but I can’t say that my prior art search was extensive. 🙂
The Headache Factor embraces your emotional self whereas The Latte Factor wants you to deny your emotional self.
It can be so incredibly difficult for me to reason with my emotional self (see my post on ice cream or Garrett’s post on our frivolous spending and you’ll see why), and while I am better today, I recognize there must be compromises. Does anyone else have trouble trying to deny their emotional selves that cupcake treat, craft brew, or take-out coffee? I don’t think I’m alone, which is why I’m inclined to consider The Headache Factor of our spending rather than The Latte Factor.
The Headache Factor wants you to consider how you feel about how you spend your money and it challenges you to cut spending in areas that cause you grief and not in the areas that bring you joy. The Headache Factor wants you to focus more on the joy of achieving a financial goal today and less on the sadness of losing something like a frivolous purchase.
For example, The Latte Factor says stop going out for coffee because $5 today is worth much more in the future.
However, The Headache Factor considers that you’re working a full-time job, you have kids, and enough on your plate that adding “make coffee every morning” to your to-do list would be a headache. But you still want to cut your spending, save money, pay off debt, etc…so what do you do? Focus on what you gain today as well as what you gain at retirement.
Let’s use line items from our monthly budget as examples.
(Note: We use an annualized system for our budget based on our projections from last year.)
Auto Insurance, Fuel & Repairs: $514
We have three cars, so we spend way too much money on cars–in fact, it’s frivolous spending. However, two of the three cars are on leases, leases that end this year. We’re going to one car, which significantly reduces our insurance premium. Projected monthly savings will be $100.
Current Headache Factor: 6/10
Future Headache Factor: 2/10
While juggling one car might make commuting a little more challenging, the headache of having (and paying for) multiple cars is fairly significant. We’ve learned a lot since we stopped wasting money.
Bills & Utilities, such as Electric, Garbage, Phones, Water & Sewer: $290
We’re pretty good about conserving electricity and water. Notably, our cell phones make up almost half of this category. Half. Yuck. With choices like Republic Wireless and FreedomPop, a cell phone bill of $140 each month is frivolous spending. Our contracts end in September, so I’ll be shopping the myriad of alternatives available. Projected monthly savings will be $100.
Current Headache Factor: 7/10
Future Headache Factor: 3/10
Moving our phones to another service provider might be a bit of a headache for a day or two, but we’re not loyal to our carrier, which will save a lot of money.
We’ve gone back and forth on restaurants. We used to spend frivolously on restaurants meals. Then, we tried The Latte Factor on for size and found that complete avoidance caused a lot of strife. Ultimately, we decided it wasn’t worth the additional headache/hangriness to avoid all restaurant meals forever. Yeah, we could be better at planning meals, and we’re trying. Yeah, we could pack snacks in the car, which we do, but I eat all of them. 🙂 To reduce our budget for the next few months, we’re meal planning around the dry goods that we’ve somehow managed to stockpile in our two tiny cupboards, which I find rather amusing since we live in 536 sq ft. Projected monthly savings will be $200.
Current Headache Factor: 8/10
Future Headache Factor: 5/10
Given our on-going struggles with food, I think there will continue to be some level of headache, but I’m hopeful.
ICYMI, I loathe mortgage debt. Our big house mortgage was more than $1,100, which coupled with improvements, maintenance, and repairs, contributed a 10/10 headache (and lots of frivolous spending). Downsizing to the small house was and continues to be one of the best things we did for life and budget. While our small house mortgage payment is $500 less than our big house mortgage payment, it is still a debt we want to eliminate. We’re aggressively trying to eliminate this, which you can see from the mortgage tracker (right side on desktop, below this post on mobile devices). You can also see how much money we’ve been applying to debt when you visit Our Finances page. We will pay off our mortgage this year, which leaves taxes and insurance to manage. Projected monthly savings is $400.
Current Headache Factor: 9/10
Future Headache Factor: 1/10
Once we’re debt free, no more headache!
Student Loan Repayment: $475
I oscillate between love and hate when it comes to student loan repayment. Really, you could ask me today how I feel about student loans and my answer might be drastically different than it was the previous day. Once our mortgage is paid off, we’re avalanching this. Projected monthly savings: $475.
Current Headache Factor: 10/10
Future Headache Factor: 1/10
Once we’re debt free, no more headache!
The Headache Factor Recap
Given that we think we spend $400 each month in a frivolous fashion, there is work to be done. Currently, I sit at an average of 8/10 for The Headache Factor–this isn’t a scientific study, but 8/10 seems not great. Even these results surprised me.
In the future, it appears that The Headache Factor will be 2.4, on average. By reducing The Headache Factor in the aforementioned line items, we can save $1,275 each month and a lot of headache, all without giving up every single thing that brings us joy or those things that make life a little easier.
Using this Latte Factor Calculator, an 8% annualized return and 30 years to grow, guess how much money we have in 2046?
Let’s wrap up with a new challenge. Last week, I challenged you to come up with just one thing you could do in one day. Let’s get to this week’s challenge.
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