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preet banerjee

Latte art at Caffe Artigiano in Vancouver, Jan. 28, 2010.John Lehmann/The Globe and Mail

There is the habit of caffeine and then there is the hobby of coffee. Knowing where you fall along this spectrum helps when deciding how much you should think about the Latte Factor.

The Latte Factor is essentially the idea that over time, habitual expenses add up to a large opportunity cost. This buzz phrase was coined by David Bach, the American author of eleven straight bestselling personal finance books, according to his website. Years ago, I remember seeing him on television demonstrating how a daily trip to a premium coffee shop could end up costing you a million bucks if you factored in the opportunity cost of not investing that money.

Coming up with an exact calculation of how much your morning cup of joe has cost you over the years is a bit of a stretch. And while drinking coffee is certainly not the reason we won't become millionaires, the costs of habitual expenses – like caffeine – are worth looking at in more detail.

According to the Coffee Association of Canada, 65 per cent of our nation's adults drink coffee on a daily basis. On average we drink eight times as much coffee at home as we do outside the home. Whether you brew your own coffee or buy it on your way to work, there is a huge variance in cost.

I consider coffee to be a fairly serious hobby. I spent hours researching and testing various espresso machines, trying out different local roasters, and writing out the perfect combination of dosage amounts, grind coarseness, and tamping pressures to extract my perfect shot of espresso.

Since it is as much a hobby as it is a habit, I'm happy to spend more than the average coffee drinker likely does. I certainly would not pay the $100 or more a pound for the most expensive coffee beans in the world, excreted by Asian palm civets. (You can think of your own pun for how bad of an investment that is.)

No, my favourite beans are roasted every few days down the street for $11.99 a pound. Including waste grind, a pound will get you 20 double espressos, about what is consumed each week between my girlfriend and me. That would be well over $40 at a coffee shop. Figuring that I might make a few more shots per week than if I were constantly buying out, I'll assume a $20 a week savings.

When I factor in the cost of the my Breville espresso maker, I'm only saving a bit when compared to buying daily at a premium coffee shop. But I think it's okay to indulge responsibly when it comes to hobbies.

Habits are a different story. Thirteen per cent of the coffee consumed in Canada is instant coffee, which is pretty cheap. More recently, a large surge in single serve coffee makers, like Nespresso and Keurig to name only two, has shifted the economics of coffee consumption. A growing number of people who are skipping their instant brew in favour of using a single-serve machine at home or in the office have found their coffee costs rising.

In addition to the higher cost, all those little plastic and metal pods add up to a lot of waste. The personal finance blog ran a detailed analysis and found a simple solution for those of you with single serve coffee makers: reusable filters into which you put your grind. Cost savings? Sixty-one per cent or about $300 per year based on two cups per day, plus considerably less waste.

The bottom line is that when it comes to coffee, everyone needs to make their own decision about how much they want or can afford to spend. If you're a coffee lover, the costs of your coffee hobby are going to lean toward the more indulgent end of the spectrum. But there are still tradeoffs to be considered, both from a financial and an environmental perspective. If your cup of coffee is just a caffeine habit, perhaps there is more to gain from finding ways to get your daily fix as cheaply as possible.

A real opportunity to take advantage of any latte factor that exists is if your caffeine habit has morphed from a simple cup of coffee to a frequent, large, flavoured over-indulgence with a name that has to be written down to be remembered. Percolate on that.

Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network and author of the new book, Stop Over-Thinking Your Money! Follow him on Twitter at @preetbanerjee.