I’ve seen it all over the PF blogosphere. People are feeling dissatisfied with the “latte factor” concept. Some find it too simplistic, others non-applicable. I’m among the latter. I’d like to define (my understanding of) the latte factor before we go any further.
The Latte Factor: Besides making wise decisions on big-ticket purchases, we should be looking for little financial drains in everyday life which add up over time. If we cut some of these out and invest the money, we’ll end up rich.
Paid Twice wrote that in Smart Couples Finish Rich, David Bach suggested that people could find $10/day to save:
Well, it is not that I disagree with the premise that the problem is not our income, it is what we spend. But… really. I found some of this a little irritating. The example Bach uses for the couple who can’t save $10 a day – are they for real? I mean, they were frittering away $80 or more each day on lattes, muffins, lunches… do these people *really* think they aren’t spending any money they can save? Even before I started this huge debt reduction kick – I wasn’t buying lunch and a latte every day. Not even close. So… I wish there had been more realistic examples, the one in the chapter really seemed a bit over the top.
Like Paid Twice and many of the rest of you, I don’t have any of those daily expenses like that to cut out. I’ve packed lunches since I started working, always take the metro, don’t drink coffee, use the water cooler or water fountains, don’t even use makeup…I could go on, but that would be a whole post in itself.
The point is that those of us who have developed frugal habits can’t really do the latte thing. If I cut out my two cups of coffee a month, I’d just be sad. Those are our date nights (like tonight, actually). I try to make wise decisions on big and small issues, but don’t find much to reduce.
So how can the latte factor possibly be useful to us?
It can be encouraging, I think. Here’s how:
Start counting up purchases which you really wanted to make but didn’t. Keep the list as a little scorecard in your head. Don’t count them as real savings in your ledger, but use them to make you feel better. Maybe it’s an old habit you broke a while ago, like smoking. Maybe it’s a book/DVD/dress/gadget you really want but can’t afford right now.
Tell yourself, “Wow, if I wasn’t such a cool person, I might have bought that. And then I would be deeper in debt/behind on my savings/whatever matters to me financially.” If you’re feeling really creative, run a quick calculation about what that money would be worth by the time you retire. Try it at CD level-interest as well as something higher to get yourself a nice range. Or try to figure out how much interest it would have cost you if you’d put it on your credit card. Look at all that money you’re saving and feel really happy about it.
This isn’t a financial hack at all, but it can be psychologically comforting for us frugal folks.
(Should you never buy the book/DVD/dress/gadget? No, I’m not saying that either. But if you’re living wisely, it provides positive reinforcement to look at more than the money you wanted to spend and didn’t because you couldn’t afford it and consider that as a different kind of savings. “Oh, if I’d bought the iPod when I wanted to, I’d be this many more dollars in debt at this interest. But I didn’t. I’m smart. Yay!”)
This is being featured in the Carnival of Personal Finance at The Dough Roller. Go there to read great stuff by other authors!