Wednesday, November 29, 2017
My Take on The Latte Factor
I am a strong advocate for sacrifice to obtain a higher goal. I believe saving and investing takes dedication, hard work, and humility. I also believe that we should not punish ourselves by taking away the simple joys of life. The problem is finding the right balance between joy and pain. I know what it is like to spend every dollar on joy. Nights out, toys and shopping sprees can kill a cash flow. I also know what it is like to budget every single dollar and not waste a cent. Both those days are over for me thank god, but that is only because I found a balance between the two. Today I will explain what the “Latte Factor” is and why it might be right for you. I will also touch on what I don’t like about the “Latte Factor.” Grab a cup of coffee, or better yet, a glass of water, and find out what you are doing wrong.
What is the “Latte Factor?”
Popularized by the best-selling author David Bach, the Latte Factor forces us to look at the small expenses we have in our daily life. Straight from his website, David describes the theory like this:
“The Latte Factor is based on the simple idea that all you need to do to finish rich is look at the small things you spend your money every day and see whether you could redirect that spending to yourself. Putting aside as little as a few dollars every day towards your future, rather than spending it on little purchases such as lattes, bottled water, fast food, cigarettes, magazines, and so on can really make a difference between accumulating wealth and living paycheck to paycheck. We don’t even realize how much we are spending on these little purchases. If we did think about it and change our habits just a little, we could actually change our destiny.” David Bach – The Latte Factor
That’s some deep stuff. It literally describes almost everyone I know, including myself at times. The point of Bach’s analysis is that we all have grown accustomed to spending money constantly on a daily basis. If we curb that trend, we could use those extra funds for long-term savings. While some people have picked apart David’s analysis, stating that it assumed far too much like interest rates and the actual cost of a latte, I personally think it is a great theory. That does not mean that it doesn’t have a few holes. Let’s first look at what I agree with about the “Latte Factor.”
What I like
Seeing how this week at Budget Boss is all about Cash Flow, I love how the “Latte Factor” gets right to the heart of people’s budgeting issues. I am a strong advocate for stopping the daily leakage that occurs in peoples cashflow. I know all about it, I have been there. It can be a never-ending cycle. Wake up, grab a coffee and sandwich for breakfast. Put some gas in the car. Buy a pack of gum and a magazine at the variety store. Lunch with co-workers at the restaurant around the corner. Pick up dinner on the way home. It is easy to spend $50-100 during your day on variable spending before you get back home at night. For some people that is the majority of their pay! If that is the case; what did you accomplish that day? All you did was make enough money working that day, to make it to another day. All of a sudden, a week, a month, a year, 5 years pass by and you are essentially in the same place you were when you started.
Stopping the leakage on a daily basis is absolutely necessary for everyone’s budget. Look at it this way: if you cut out that coffee and bagel this morning you could have a vacation every year. ($5 x 5 days a week x 52 weeks a year = $1300). That is some pretty good incentive if you ask me. But what about those people who say, “It is the simple pleasures in life that make life worthwhile” My question is this: “Why do the simple pleasures always include spending money?” Isn’t reading a book by the lake a simple pleasure? How about taking the kids to the park? Even walking down by the river can be relaxing. Does it always have to be the simple pleasure of overpriced coffee or the relaxation of shopping till you drop? Now I may sound a bit harsh, but don’t lose me here. There is a side of me that doesn’t like everything about the “Latte Factor.”
13 Wastes of Your Money – Budget Boss
What I don’t like
I think everyone should be able to enjoy themselves in life, even if that means spending a little money to do it. I would never expect someone to forego their morning coffee. Conversely, I would also never expect someone who can’t pay their bills to buy expensive coffee every morning. I would never expect someone to never have any fun, even if it costs money to do so. I also don’t expect people who are in mounds of debt to take bi-annual vacations because they work hard and feel they deserve it. I feel that if you are saving enough money, staying out of debt, protecting the ones you love with insurance and making your monthly bill payments on time every month, you should be able to spend every dollar you have. If that includes buying 3 lattes a day, go for it. I feel the “Latte Factor” symbolizes the tendencies of those who put off savings or run a negative monthly cash flow. If you do those 2 things, then yes, cut out the lattes. If you do not, then get your coffee. I think rewarding your own good behavior is essential to keeping on track with your goals. Running a positive cash flow is good behavior in my opinion and that should be rewarded. Here is a simple checklist on whether you need to analyze your monthly cash flow and possibly cut out the “Lattes:”
1) Do you have non-mortgage debt? (this includes student debt, it is not good debt by the way)
-How long will it take you to pay off and can you speed that up by cutting back spending?
2) Do you meet your monthly obligations early or on time?
3) Do you put money aside every month into savings and is it enough?
4) Have you saved a cent for retirement?
5) Are you spending any money on protecting yourself and your family?
6) Do you live paycheck to paycheck?
7) Do you have an emergency fund of at least 6 months of living expenses?
What a crappy list eh? I have met very few people that can cross off all those points. What that tells me is that we all must analyze our spending. It is this monthly cash flow that will add up over time to produce a good or bad life financially. Taking some time to make sure you end up every month on top will allow you to one day spend every last dollar. Sadly, it may require you to pack your coffee and lunch for work while you are younger. Don’t fret though my friends, packing your coffee today will allow you to sip espresso on the beach when you are older. I like the second one much better.
How much money you need to save every day to become a millionaire by the age 65 – David Bach
“Great achievement is usually born of great sacrifice and is never the result of selfishness.” – Napoleon Hill
Email – joe@budgetboss.ca
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