I first heard of the “latte factor” in David Bach’s The Automatic Millionaire. The main idea behind the latte factor is that most people can find a way to cut something out of their lives that will allow them to save $5 to $15 per day; for example, an expensive latte and a muffin, or maybe that glass of wine with dinner. Ideally, this $5 to $15 per day can be saved in a tax-sheltered retirement account and will build up over the years, averaging 8 percent returns. The earlier you start, the earlier you can retire, or stop contributing, thanks to the magic of compound interest.

Let’s take a look at what $10 a day really gets you: $10 x 365 days per year = $3,650 a year.

Personally, I believe that cutting out all of your little luxuries is a surefire way to misery and failure — just like extreme diets that never let you eat sugar. Studies show that small doses of happiness on a daily or weekly basis do more to increase overall levels of happiness than larger, infrequent doses.

I’ll be honest; I have tough days. I have two kids with autism, I work from home, and my days get very full. Sometimes that latte or glass of wine is something I really look forward to. Also, because I work from home rather than renting an office, I often use Starbucks as a place to meet people for work, or for new hire interviews because I don’t want to bring strangers into my home. So, the amount I spend on Starbucks actually saves me in the long run.

If the daily latte or weekly massage increases your overall happiness, then do it. There are other ways to make up for the difference. Will living in a smaller house and driving last year’s car model allow you to have a better standard of living? Staying out of debt and not paying interest on your purchases can make more of a difference than drinking a latte every day.

Of course, we should all make arrangements for retirement, and Bach’s suggestion to automate contributions to tax-sheltered retirement accounts is a fantastic way to maximize savings. Everyone should contribute towards their future, but we should also be able to enjoy our lives today. When you look at your overall expenses, there are probably some that make you smile, like that amazing vacation you took or the perfect birthday present you found for your best friend or spouse. There are probably also some that make you frown, like those extra data charges on your cell phone bill and the rising premium on your health or car insurance. If you ever check on the amortization schedule of your mortgage and see that you are paying more interest than principal, that will probably make you frown as well. I urge you to look at the big expenses, the frown expenses, and all the neutral expenses, so you can get your savings from there, and leave your happiness budget intact.

So how do you save enough on the big items to allow a bit more luxury on a daily basis? The first step is to build an excellent credit score so you pay the lowest interest possible on large loans. Not sure what your credit score looks like?AnnualCreditReport.com has all the info you need. Credit Karma is a great resource for those looking for suggestions on how to improve their credit ratings.

Having a good credit score results in a much lower interest rates on major loans, which will help you save a lot of money. For example, the difference between excellent and poor credit can be the difference between 4 percent and 6 percent interest charged on a 30-year fixed mortgage. If you take out a loan for $200,000 (that is for a $250,000 house after a $50,000 down payment), those 2 percentage points can save you around $88,000 over the life of the loan. That’s a lot of lattes. Almost $3,000 worth of lattes per year, or $244 per month, for 30 years.

Having a good credit score can also help you save money on a car loan by getting you the best possible interest rate. However, you can save even more money by purchasing last year’s model with low mileage instead of buying a brand new car. Let someone else take that immediate depreciation the moment the new car drives off the lot. If you buy the car within the initial warranty period, you can still get the rest of the warranty and can usually extend it for a reasonable price if that suits your needs.

Of course, buying a used car with financing usually means paying a higher percentage rate than if you bought a brand new car (those special 0.9 percent financing rates are reserved to help the dealers sell the newest models), so the best strategy is to save up and pay cash instead. How do you save up so much cash for a new car? The best way is to drive your old car for a full 10 years — that’s at least five years after you finish paying off the last loan. Then do the same thing with your next car. It may not be flashy to buy a Honda or Toyota that will last 10 years or more, but there is no better way to get the most out of your vehicle money.

Another way to save big over the course of your lifetime is to negotiate down your credit card interest rates or better yet, eliminate credit card interest fees altogether by always paying the full balance every single month — and paying on time of course — to work towards that impeccable credit score.

To see how different interest rates, monthly payment amounts, and number of years of mortgages, car loans and credit card debts affect the amounts you pay in interest, go to Bankrate and check out their various calculators. This is a great tool to help you build a strategy to reach your long-term financial goals without sacrificing every little luxury along the way.


Jen is a Personal Financial Trainer helping female entrepreneurs and self-employed women take control of their finances. She's the host of the Financial Fluency Podcast. Visit her site to learn how to master your money matters.