The latte factor. If you haven’t heard of it, it’s essentially this: Save your $4 a day that you spend on lattes and put it into a retirement savings account to become a millionaire after 30+ years. Or something like that. Actually, after using an investing calculator, you’d probably end up at about $180,000 or so. Either way, the plan is; stop buying lattes, retire rich. You get the idea.
How It Really Works
This idea is one of the concepts author David Bach uses is his book, The Automatic Millionaire, to illustrate that everyday choices can lead to prosperity. And while I agree with this in theory, I don’t know how well this works out practically. Actually, since I believe we live in a fallen world where impulse and emotion rule our decisions over logic and rationality, I don’t see this working out practically for 99% of Americans. Here how I think it really works:
You are in line at your favorite coffee stand or your local Starbucks, about to drop a fat $4 bill on your delicious latte. But then you remember that you don’t want to eat dog food when you retire because you’re so broke, so you promptly floor it and race your way out of the drive through line that was about to compromise your entire financial future! Phew! You dodged a bullet there, and now you contently drive to work, knowing that you are going to retire with millions in the bank because of your bold choice that morning.
Except, that $4 never made it into your Roth IRA. Actually, it doesn’t even make it through the day without being allocated somewhere else in your budget that does NOT help you put money toward your debt or retirement account. You are so proud to have saved that cash that you reward yourself by eating out with co-workers. DOH! Or you are enjoying the glory that you have bestowed upon yourself for your sensible decision that you blow your cash on candy at the grocery store checkout. Or, the money just sits in your account, just to be absorbed elsewhere, and disappears like a sock in a dryer, never to be seen again.
How It SHOULD Work
The latte factor is the idea that you can save on small things to build a large savings, specifically for debt payoff or retirement. But, as you probably have experienced, just because you save money on something doesn’t mean your savings account is going to grow by that amount. So how do you make it work? Well, the answer is as obvious as the horrible script writing in “reality shows”, but does take a little discipline. When you make a decisions to save money on your latte, transfer the amount it would have cost you to your savings account. Really, it’s that simple.
When Michelle and I were in the trenches of paying off debt, we actually used this method. We used a local credit union that allowed us to name our savings account, which we simply named “Debt Savings.” Every time we would save some cash, or have a little extra income from somewhere, we would immediately transfer that money into our “debt savings” account, and then would use that savings to make a large payment at the end of the month. This is partly how we paid down about $5,000 of our debt within a 6-9 month period (I honestly can’t remember how long it was).
We used the latte factor to our advantage and it really helped us gain momentum in paying off our debt. This is why I tell people to give your money an identity, otherwise it will remain nameless and slip through your fingers, leaving you scratching your head and wondering where you money went. You can use the same method we did, but you can name the account whatever you want. Go ahead, make your “retirement savings”, or “down payment”, or “daddy needs a new pair of shoes” accounts and watch them grow!
You can also follow David Bach’s advice and work on automating your savings. Heck, you can have your bank (just go talk to them, they can help you set it up) transfer the money for you automatically on whatever recurrence you select. That way you don’t even have a choice to waste it on Ho-Ho’s and Dorito Tacos, it just shows up in your savings automatically. And seeing as how we live in a world that is immersed in advertising 24/7, this might be the best option to cut out impulse buys.
Make It A Priority
Now, this all is great in theory, but if you don’t make it a priority, you cannot take advantage of this savings tool. You need to look at where you money is going, and if you are not saving money or paying down your debt, you need the make it a priority. Our priorities are our filters for decision making, and if saving money is not on the list, then when you have the opportunity to save money on your daily latte, the coffee will win every time. But if you prioritize savings over lattes, you will reap the benefits (not to mention, kicking the caffeine addiction!).
Comments: Have you exercised the latte factor in real life? If you save money on something, what do you normally do with that savings? What would it take to motivate you to start using this method?