Use Your Latte Factor to Snowball Your Way to Millions

If you’re into personal finance and investing like I am, you’ve likely heard of “The Latte Factor.”  This is the concept first made famous by David Bach, the bestselling author of “Smart Women Finish Rich” and “The Automatic Millionaire.” The examples he uses in his books are of people who usually pick up a latte and a muffin for breakfast, eat out at work for lunch, and grab “a few things” on the way home. He shows how this “latte factor”, as he calls it, is actually keeping these people from becoming millionaires. Small amounts invested consistently over time in index funds can lead to great wealth thanks to the power of compounding.

There have been criticisms of the latte factor, most notably by Helaine Olen in her book “Pound Foolish” (which I’ve reviewed before and you can find here.  The usual complaints are that not everyone buys lattes, lattes don’t really cost $5, and that the compounding rate Bach used was too high. These critics are missing the point, however. The point wasn’t about lattes at all. It was about defeating the “I can’t save anything” attitude by showing that you can save large amounts of money over time by making small cutbacks in lifestyle. Your “latte factor” may not be lattes at all-perhaps you hate coffee, you’re more of a tea person, or you drink a plain coffee that costs a dollar or two. You might never have set foot in a Starbucks, but this idea still applies to you. If you tracked your spending in detail for a month, you would see all the small things that are adding up to big bucks over the course of the month. Running to the convenience store for overpriced milk and bread. Not bringing lunch to work.  Grabbing a few magazines, or a bottled water. Those are all seemingly small expenses that you can use to change your life, particularly if you’re one of the sixty percent of Americans without access to $500 in case of an emergency.

The Savings Snowball

Bach suggested simply investing your latte money and reaching millionaire status-instead, I’m going to introduce you to the “Savings Snowball”, a concept I was first introduced to in The Tightwad Gazette (pages 148-149 in The Complete Tightwad Gazette specifically). What’s that, you might ask? It’s the simple idea of using your freed up money to buy things that will save you even more money over time. Over the course of five years, you can use savings of just $10 per week to set the stage to becoming a millionaire.

Don’t believe it? Think it’s impossible? Take a look at this story and how Suzy and Dave could use a simple $10 per week savings to snowball their way to a nearly $25k nest egg, freeing up almost $7k per year to continue investing.

Using the Savings Snowball to Become a Millionaire
Use The Savings Snowball To Roll Your Way to a Millionaire

Year One – Starting Small

Suzy and Dave are a young couple just starting to think about saving and investing. Like many, they don’t have a lot of money sitting around and think that investing is just for the wealthy. So they decide to start small and target putting aside $10 every week. How are they doing that? They decided to switch from picking up coffee at work every day and bought a french press to keep at their desk, making fresh coffee at home and brewing it at work. They also committed to brown-bagging lunch once every week. At the end of the year, they’ve saved $520.

Year Two – The Snowball Starts

They keep up their new habits, preferring freshly brewed coffee to that swill sold in the work cafeteria anyway. Brown-bagging it isn’t the hardship they once thought, so they decide to bump it up to three times per week, bringing their weekly savings to $20. They also take $500 of their original savings and pick up Google Project FI cell phones when their contract with the big cell phone company runs out. Given that they previously had a very average cell phone bill of $148 with Verizon, they’re able to save  $100 per month.

Total savings end of Year Two – $1040 from coffee and lunches, $1,200 from cell phone, and $20 left over from last year = $2,260.

Year Three – Growing Bigger

They continue to bank their $100 per month cell phone savings, and coffee/lunch savings of $20 per week. They take their money from last year and invest in the following:

  • They pick up an Ooma for the house for $100, saving $40 per month on their landline bill
  • Buy meat in bulk for the year for $500, saving $1,000 over buying it piecemeal
  • Get a warehouse club membership with cash back for $100, saving $1,000 over the course of the year
  • Get new insulation for the house for $1,000, saving $600 per year in energy costs
  • Pick up an Amazon Fire TV stick or a Roku for $100, and sign up for Netflix and Hulu for $10 per month each. They’re then able to cancel their cable, saving $100 per month

Total savings end of Year Three – $1040 from coffee and lunches, $1,200 from cell phone, $480 from Ooma, $1000 from bulk meat, $1000 from the warehouse club, $600 energy savings, $1200 from cable, and $460 left over from last year = $6,980.

Year Four – Bigger Still

Continuing with the money-saving habits they developed in Year Three, Suzy and Dave are able to put away another $6,520 ($1040 from coffee/lunch, $1200 from cell phone, $480 from Ooma, $1000 from meat, $600 energy savings, $1000 warehouse club, $1200 cable). Of course they have to pay for another year at the warehouse club and for their bulk meat again, which costs $600.

They take the leftovers from last years stash, and some of their freed up cash flow, and get:

  • A pellet stove and pellets for $1000, saving $500 per year on oil
  • A home energy audit for $100, saving $300 per year in electricity
  • Several books online about saving money (like The Tightwad Gazette, my personal favorite) for $50, which gives them ideas that save another $1450
  • 401k contributions up to their employer match, totaling $6000 for the year, giving them each $1,500 per year in free money and saving $1,500 in taxes
    • Assuming they both make $50,000 per year, and get a 3% match for contributing 6% of their salary

Total at the end of Year Four – $6,520 from their monthly savings; $1800 from the pellet stove, energy audit, and books; $3000 from their new 401ks in tax savings and match; and $5,230 leftover from last year = $17,000. Six thousand of that is in their 401k, and they then use the extra $11,000 to each max out their ROTH IRA for the year.

Year Five – Let The Snowball Roll Downhill

During the past four years, Suzy and Dave have been hard at work freeing up cash flow to find room for investment. They’ve done a great job, making investments in money-saving endeavors rather than buying a new car or remodeling their house. But now, they feel like they’ve optimized their expenses almost as much as they can. This year, they focus on continuing their 6% 401k contributions, and work to max out their ROTH IRA’s again. They can do this because of the habits they’ve developed over the years, and the investments they’ve made that are now on auto-pilot. They look for bargains and deals over the year and manage to free up enough cash to meet both goals.

At the end of Year Five, without making getting any gains in the market, they’re going to have a stash of $34,000 ($17,000 from their original savings and $17,000 in their ROTHs and 401k).

Just Let It Roll

Suzy and Dave are proud of everything they’ve accomplished in the past five years. They went from having “no money to save or invest” to having tens of thousands of dollars set aside. They then decide this is a good enough strategy- they’re just going to continue doing this for the next 30 years, increasing contributions with inflation every year. Raises and bonuses will be spent on having fun – going out to eat, picking up new cars for cash, and going on vacations. But without fail, every year they set aside that money they worked so hard to free up.

So what will they have in 30 years, if they’re able to get a 10% return over that time? $2.5 MILLION DOLLARS according to this calculator. This would give them $100k per year at the 4% safe withdrawal rate. Adding this to social security would be more than enough to cover their living expenses comfortably in retirement.

Lets say they only get an 8% return – they’ll still have $1.3 million in the bank, able to take out $52k per year. This with social security, even if cut, should be enough to comfortably sustain them.

Even more importantly, their ROTH IRA’s have been working and are ready to be withdrawn with zero taxes.  Since they’ve invested in both ROTH’s and traditional, they can create a tax strategy where they’ll owe almost no taxes in retirement.

Criticisms and Counters

Whenever someone writes on this topic, I see a number of the same types of criticisms. Don’t let excuses derail you from using this information to better your financial life!  If you’re stuck in critic land, let me get ahead of the game by giving you the top four common criticisms and my counters to them:

  • Criticism: But CMO I don’t pay for (insert thing here – landlines, heating oil, cell phones, cable) – or CMO I don’t pay that much for (insert thing here – lunches at work, coffee, meat, etc.)
  • Counter: I think you missed the point. Of course everyone pays different amounts for different things! I live in the Northeast where heating costs are high, but maybe you live in Texas where you need to pay for air conditioning. Maybe you don’t have a landline, but you do have subscriptions to magazines you don’t read. The point is to take a critical look at your expenses, work to free up small amounts of cash, and use that money to invest in things that will save you even more cash in the future


  • Criticism: A million dollars isn’t what it used to be! – OR – A million dollars won’t be worth much in 30 years!
  • Counter: People who say this usually don’t have a million dollars. Sure, a million dollars back in 1920 was worth a lot more than it is today (it would be worth about $12 million according to this calculator). But having a million dollars is a lot better than living paycheck to paycheck and hoping the government will fund your retirement. Even 30 years from now, having a million dollars in the bank will make you better off than not having it.


  • Criticism: Thirty years is too long – I want a million dollars now!
  • Counter: First of all, there’s no “get rich quick” scheme that will work for you. Sorry about that. If you want get rich quick dreams, please feel free to go pay a voluntary tax and buy some lotto tickets. The real path to wealth is usually slow and steady, over long periods of time. It takes time for interest to compound-that’s the miracle in it. That said, there’s nothing keeping you from accelerating the process. You can do all this in one year if you make enough money and you’re determined. You can also decide to increase savings and investments with future raises and bonuses, rather than using them to increase your lifestyle like Suzy and Dave did. You can reach the millionaire mark faster if you save more sooner. It’s simple math.


  • Criticism: Ten percent (or eight percent) is too aggressive – the stock market won’t return that over time!
  • Counter: People who say this will also say “it’s different now!”, which has been said right before the tech crash, the real estate bubble burst, and the Dutch tulip craze. The reality is that since 1900, with dividends reinvested, the stock market has returned a CAGR (compounded annual growth rate) of 9.6%. Check out this calculator to see for yourself, and play around with the time periods. Yes, the returns in the S&P since 2000 have been under 5%. Yes, stocks might return less in the future than they have in the past. You’ll still be better off with the money than with no money. Please feel free to do the calculations yourself with whatever rate of return makes you comfortable.

Have you used this concept before in your own life? What kinds of things would you recommend investing in to free up cash flow over time? Let me know in the comments!

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21 thoughts on “Use Your Latte Factor to Snowball Your Way to Millions”

  1. I concur wholeheartedly. In the days of planned obselecence, I have always tried to “buy it one time.” I’ll buy the best quality item I can afford, knowing it will be a lifetime purchase. As I’ve matured in the FI lifestyle I’ve gotten better at making sure I actually want that product around for the rest of my life.

    1. Yes that’s so true! I’ve found that before with things like coffee makers. I used to buy cheap ones, then they’d break in a few years. Now I have a French Press, which was a bit more up front but will last forever. Bonus-I can take it with me camping, and it can be used without electricity when the power goes out!

  2. I’ll never be on board with anything more than 6% because I’m a 97-year-old curmudgeon in disguise. But that doesn’t mean I’m unwilling to be pleasantly surprised 😉

    I love this post. It’s all about momentum, right? And even if it doesn’t yield millions, it’s going to optimize so many aspects of life that it certainly won’t ever disadvantage anyone.

  3. This can be applied to both debt paydown and investing! Compounding is a very powerful thing.

    Compounding can also be applied to knowledge. When you start learning about a subject, you will start making connections with other topics you have learned. It’s a beautiful thing.

    Thanks for sharing CMO.

    1. Interesting perspective about applying compounding to knowledge-I hadn’t thought of it that way, but on reflection it’s so true. As I learn something new I’m constantly drawing connections to past knowledge and experiences, leading to new ideas.

  4. You know, when I think about safety in the real world I always think I don’t have to be the biggest or fastest, I just have to be faster or stronger then those around me to be face. There is perhaps an ounce of truth in that in the financial world as well. 1M won’t allow me to retire early, but 1M at retirement when everyone else has 20K will make you live like a king comparatively. Especially when the government intervenes to help the grasshoppers (reference to an old proverb there). So perhaps 1M really is a decent size number when you think about it.

    1. Exactly true! Having a million is most certainly better than having nothing and hoping to be bailed out. Even if the government did bail out low savers, likely it would be to support a low quality of life. I’d much rather have a nest egg for my family and I to use however we see fit

  5. TheRetirementManifesto

    The reality is clear: Spend Less Than You Make, Invest The Difference, And Do It For A Long Time. Use some tricks (like you’ve outlined here) to leverage the “Spend Less” leg, then let compounding take care of the rest.

    It’s simple, if not easy…..

    1. Just like losing weight-simple (eat less & move more) but not easy! I always enjoyed reading these kinds of examples when I was getting started saving because it gave me hope that even I could one day be wealthy, with small changes compounding over long time periods. Hopefully others enjoy them as well!

  6. Mrs. Need2Save and I drink a lot of coffee, so we would be broke if we bought every cup from Dunkin Donuts (sorry Starbucks, we are DD folk)!

    I think that most people could easily find $50 a month in ‘cutbacks’ to get going with the savings snowball. Once they start to see it grow over a few months, then hopefully they will get inspired to find more ways to save as you’ve outlined. I’m not much of a game player (none really) but this seems like an area ripe for gamification. Looks like I have an app to start working on…

  7. I love the easy to do concepts that you present here. It’s all about choices. If you want to do something you show how easily it can be done if you make a small sacrifice. Over time it can really grow big and make a huge difference. Too often people have such short term perspectives that they can’t see the long game in things 🙂

    1. I’m not a latte person myself, but I do enjoy an occasional grande bold red-eye (black coffee with a shot of espresso). Only a few times a year as a special treat though. If I had it more often, it wouldn’t be as special.

  8. Great post!

    The compounding effect of small savings is easily overstated, but also easily ignored. Finding $15 in savings per day will make you a millionaire given 40 years. Whats even better is if you can kick a habit, improve your life, and pay your future self in a single action.

  9. The real path to wealth is usually slow and steady, over long periods of time. By this long journey, people will learn how to use his money when they become rich. People use quick money quickly like gamblers in Casino.

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