2021-08-13

The Myth of the Myth of the Latte Millionaire

In 1999, David Bach popularized the idea of a Latte Millionaire: someone who stops making a small luxury purchase, and thanks to the magic of compound interest, later finds themselves a million dollars richer. As he asked in 1999, “Are you latte-ing away your financial future?”

Modeling the problem as a geometric series, we get that $5, saved each day for 50 years with a 8% growth rate (10% less 2% inflation), does indeed result in 1.05 million dollars.

Since then, the idea has come under repeated scrutiny. The Guardian calls it “a nice fairy tale… also not true”. Slate denounces that it “wasn’t true. It didn’t work mathematically”. Eater sarcastically writes “rid yourself of all material delights, you piece of garbage”. Most substantially, there are three primary objections:

It doesn’t work out mathematically, the model is wrong
It doesn’t work out politically, we’re blaming poor people for luxury spending instead of addressing the real issues of poverty
It doesn’t work out behaviorally, if you don’t buy a latte, you’ll feel the extra money burning a hole in your pocket and buy something else later

I actually don’t disagree at all. A Starbucks latte is only $2.95, and S&P returns are around 9.81%, so 7.8% less inflation. That gets us to $577,000, still pretty good, but not quite an even million. Bach’s claim is also outdated. A million in 1999 would be 1.64 million today, so the claim is exaggerated by about a factor of 3.

The critics are right politically as well. Decades of personal finance advice have pinned poverty on the poor, shaming them for improper retirement savings and irresponsible personal finance. But it’s too easy to use that as an excuse for poor economic policy and fail to fix the underlying conditions that allow poverty to exist at all.

Finally, I’m sympathetic to the view that people do tend to squander extra change. If not a latte, then for a beer after work.

…and yet, it’s dangerous to lean too heavily into this kind of thinking.

Sure it’s not a million, but $577,000 is still pretty good. Maybe a latte wasn’t the right metaphor, but many of us do have unnecessary luxury purchases. Sometimes I take an Uber instead of the bus, or buy too much produce and have to throw it out. I don’t know how much it all adds up to, but I wouldn’t be surprised if I was wasting more than $3/day on purchases that don’t really contribute to my happiness.

While it’s true that we need better economic policy, the view that people can’t take responsibility and can’t be taught to make better decisions is infantilizing. Yes, housing, healthcare and education costs have skyrocketed, that still doesn’t make you helpless in the face of macroeconomic trends.

In 2012, Derek Thompson reported that “Households earning less than $13,000 a year spend a shocking 9% of their money on lottery tickets”. Overall, a 2018 study found that “35% of lottery players had incomes below $40,000”. Another survey finds that consumers making under $20,000 spend on average 1.6% of their pre-tax income on alcohol.

You might object that this discussion is equally infantilizing. Isn’t it wrong to police the consumption of the very poor? Isn’t it wrong to suggest that they don’t also merit hope, and wonder, and nice things? That’s true, and for what it’s worth, I would also berate a wealthy friend for buying lottery tickets, but I’m desperately hoping for the tiniest bit of nuance here. It is both possible to argue that policies hurt poor people, and to acknowledge that people behave sub-optimally. As Tyler Cowen once wrote:

People who see a political war against the interests of the poor and thus who are reluctant to present or digest analyses which blame some of the problems of the poor on…the poor themselves. (Try bringing up “predatory borrowing” in any discussion of “predatory lending” and see what happens.) There’s simply an urgent feeling that any negative or pessimistic or undeserving view of the poor needs to be countered.

Actually, to be even more clear, none of this is meant as a negative view of the poor. It’s just a negative view of people. According to that same survey, wealthy people spend much more on alcohol than the poor! Not as a percentage of income, but in absolute terms, it’s still bad.

Finally, I just don’t really buy the behavioral explanation. People are capable of change, as the countess anecdotes on various personal finance subreddits and legions of Mr. Money Mustache followers suggest. There’s no reason excessive un-frugality has to be the norm.

For that matter, the objection is particularly ridiculous when it comes to coffee, which as you might remember, is literally a habit-forming dependency-inducing psychoactive drug. That’s not to scare you off from drugs, it’s just to say: If there is a purchase which, although unnecessary, repeatedly brings consumers back time and again, coffee is a pretty likely candidate.

So enjoy your latte if you want, but consider doing the math too.