Latte Factor Calculator

What is Latte Factor calculator?

The Latte Factor calculator estimates the opportunity cost of petty expenses incurred over a period of time. The term ‘Latte Factor’ was coined by American financial author, David Bach. Bach suggested jettisoning recurrent small expenses and investing the money instead. Unfettered indulgence in binge spending has ramifications on long term wealth.

The BT Latte Factor calculator helps estimate earnings if money is spent on SIP instead of trivial expenses. The calculation is based on inputs viz, expenditure, duration of expense (years), frequency of expense and annual return forgone. Annual return forgone is the return that you have forgone by indulging in spending rather than investing.

How does Latter Factor Calculator work?

The Latte Factor calculator uses 4 inputs viz, amount of expense, duration of expense, expense frequency and annual returns forgone by not investing. It measures the opportunity cost of expenses on trivial purchases. For calculating the return on SIP investments, the calculator uses the formula

P [(1+i) ^n-1] x (1+i)/i

• P: SIP amount. In this case, the SIP amount is the expenditure made each month. In case the spending frequency is monthly, the SIP amount is equal to the monthly expense. In case the spending frequency is weekly, the SIP amount is determined by multiplying the weekly expense by 4. Thus, if the weekly expense is Rs 500, the monthly expense will be Rs 2,000 (500*4). The monthly SIP here will be Rs 2,000. In case the spending frequency is daily, the SIP amount is calculated by multiplying the daily expense by 30. For instance, if the daily expense is Rs 100 then the monthly expense will be Rs 3,000 (100*30). In this case, the monthly SIP will be Rs 3,000.
• i: Expected rate of return from SIP. In this case, the expected return is given by annual returns forgone.
• n: Number of installments that is, Investment duration x frequency. Here, the frequency is monthly as we are considering only monthly SIP. Investment duration is equal to the duration of expenditure. Thus no. of installments is Duration of expenditure (years) * 12
  

  Total expenditure incurred = Amount (daily*30/weekly*4/monthly*1) * 12 * Duration of expenditure (years)

• An example of how Latte Factor calculator works

  Assume you spend Rs 50 each day for 5 years. Thus, monthly spending is Rs 50*30 = Rs 1,500. In 5 years, the total expense made is Rs 90,000 (50*30*12*5). Assuming an expected annual return of 12%, had you invested Rs 1,500 through monthly SIP, you would have earned almost Rs 1.24 lakhs. The Latte Factor calculator allows you to recalibrate the inputs in order to provide a precise estimation of the output.