Do Small Purchases Really Hurt Your Long-Term Financial Security?

Is buying a latte bad for your financial security?

Is buying a cup of coffee really bad for your finances? According to some financial experts, yes. The Automatic Millionaire's David Bach first popularized the term "latte factor." The premise is that investing the money used to buy a $5 latte every day can add up over time.

Bach isn't the only one who believes in redirecting the money you use for small purchases to your investments. Suze Orman, known for her tough-love financial advice, believes that anyone paying $1 to $3 for a cup of coffee is essentially "pissing $1 million down the drain." For years, some financial experts have stated that small purchases like these would affect your long-term finances. Are they right?

Is your daily coffee habit costing you $1 million?

Suze Orman argues that takeout coffee is a "want," not a "need" and that cash could be invested and put to work. The example she uses is assuming you spend $100 on coffee each month. That same $100 invested into a Roth IRA will be around $1 million dollars in 40 years assuming a 12% interest rate.

In the Northwestern Mutual 2022 Planning & Progress Study, 53% of Gen Zers and 52% of millennials stated that making small daily purchases like a daily cup of coffee will impact their long-term financial security. On the other hand, 68% of boomers and 54% of Gen Xers stated otherwise.

The study found a strong generational difference when it comes to how people view the impact of their daily financial decisions. The younger generations believe that small daily purchases -- such as a cup of coffee -- will have an impact on their long-term financial security. This shows a shift in one generation to the next. No doubt financial gurus like Suze Orman have made an impact with their message. Does this mean you shouldn't enjoy the little things in life?

Read more: Here Are Americans' Financial Assets by Age. How Do You Compare?

It's okay to have a latte

While Orman and Bach are right that investing early and often is important, it doesn't mean you can't enjoy the little things. The $1 million dollars that Orman mentions is assuming you spend $100 a month on coffee and get a return of 12% a year. Using the lower end of her range of $1 a day, and using a more realistic return of 7% would amount to about $78,000, a far cry from the $1 million.

If you are living paycheck to paycheck and have no savings, then spending $5 a day on a latte isn't the smartest move. But if you have a financial plan in place, are debt-free, and are saving regularly for your financial goals, then it is okay to enjoy life. The key is to not let your spending get out of hand. If one latte results in a bagel, breakfast sandwich, or other items that cost significantly more, then it is important to be more conscientious about how you spend.

You can cut out all the small purchases you want, but one or two bad spending decisions on big-ticket items such as a car or home can have a larger impact on your finances. This is where a budget is helpful. Setting a budget can actually help you enjoy the little things important to you while avoiding spending on things that are not. You can create a line item in your budget for small purchases like lattes. Once you hit your max, then you stop buying them.

Read more: Budgeting Secrets for Those Who Dislike Budgeting

Pay yourself first!

The real question people should be asking is not about lattes, but about sticking to a financial plan and budget. One of the easiest ways to ensure you set yourself up for future success while enjoying life today is to set aside a portion of your paycheck to be automatically invested every month. Then you can budget and spend the money that's left over. By paying yourself first, you don't have to feel guilty about enjoying something small like a latte. Using this strategy can help you enjoy the best of both worlds.

You don't have to live an austere life in order to meet your long-term financial goals. Spending small amounts of money on items that give you pleasure doesn't mean you will sabotage your future. The key is being conscientious about how you spend your money. Understanding how you spend money helps you cut out unnecessary expenses. The problem isn't small purchases like a latte, but undisciplined spending.