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This interview should be required listening for women — and men — who are in a relationship, particularly a marriage, in which the woman earns more than the man. This is precisely the situation in which author Farnoosh Torabi has found herself, and as a popular financial columnists, she discovered she wasn’t alone.

Based on her own experiences, questions from her readers, she began researching relationships for her latest book, When She Makes More: 10 Rules for Breadwinning Women. The book features stories from and advice for the growing number of couples who are seeing this non-traditional income dynamic.

The book will be released May 1, but Farnoosh is offering several special deals for anyone who orders the book before its release. You could win care baskets from the author’s favorite brands and services, including TaskRabbit, Evernote and Stella & Dot. You might also win lunch with the author and a backstage pass to the NBC Today Show. After you pre-order your copy of When She Makes More, visit this page to enter to win one of the freebies.

In today’s episode of the Consumerism Commentary Podcast, Farnoosh Torbai discusses this phenomenon and offers tips and suggestions for adapting to a different financial balance. Continue this article to listen to the podcast. You can also subscribe to the podcast in iTunes.

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This is a guest post from J.D. Roth, who founded the Get Rich Slowly blog and currently writes at More Than Money. J.D. recently launched a year-long "Get Rich Slowly" course, which is based on the idea that you’d have greater financial success if you managed your money as if you were running a business. I’ve previously written about approaching your finances like a business.

I’m convinced that more people would achieve financial success if they managed their home economy as if they were running a small business. We all know that a company needs to earn a profit to survive, but few understand that the same principle applies to our personal lives.

To build personal wealth, you must spend less than you earn. When you do, you’re earning a “profit” and building wealth. But if you spend more than you earn, you’re losing money and in danger of falling into debt. The greater the gap between your earning and spending, the faster your net worth grows (or shrinks).

The key is to boost the profitability of your personal economy by spending less and earning more.

But not every path to profit is equal. Some opportunities are unappealing because they take either a lot of time or a lot of effort -– or both. Other options are a low priority because they have only a small impact on your bottom line. The best paths to profit – in business or personal life – are those that provide some combination of low difficulty and high reward.

There are four types of things you can do to reduce your expenses or boost your income.

  • Pyrrhic victories are activities that take a lot of time or effort without yielding an equivalent payoff. In business, these might include sweeping the parking lot or leasing a large office space. On a personal level, these are things like making your own laundry detergent or raising money by collecting old newspapers door-to-door.
  • Ongoing projects also require a lot of time or effort, but they provide huge payoffs when they’re finished. Last year, for instance, I organized and sold my collection of comic books. That project took over 100 hours of tedious work, but paid off with a $25,000 windfall. Similar projects might include moving to a cheaper home in a cheaper city or returning to school to earn a degree.
  • Daily victories are the bread-and-butter of personal finance. They’re easy (or quick) actions that yield small rewards, such as working overtime, clipping coupons, or making use of the public library. Because there are so many small, simple ways to boost your personal profit, these are the things most commonly covered in books and blogs and magazines. These daily victories are great—but it takes a long time for them to affect your bottom line.
  • Big wins are the Holy Grail. They’re the easy (or quick) things you can do to supercharge your saving rate. These include negotiating your salary (which takes minutes, but can pay off for decades to come) and reducing your transportation costs (which you can do in a matter of days).

You can improve profits by doing things in all four categories, but it’s important to keep each action in its place.

You should only pursue Pyrrhic victories when you’re unable to do any of the tasks in the other three categories. It’s foolish to try to get out of debt by making your own laundry detergent while you still have a huge mortgage. That’s like Microsoft trying to boost profit by spending less on pencils instead of selling more copies of Windows.

And what are the best ways to achieve these big wins? Well, it’s doing the things that most other people are unwilling to do:

  • Down-size your home. Housing is the biggest expense for most Americans, and by a wide margin. The typical household spends $1408 on housing each month, or about a third of its budget. Drop that by 10%, and you’ll save $150 per month. Drop it by 30% and you’ll save more than $5000 per year!
  • Drive less. Transportation is the second-largest expense for the average family. You can save big by biking or walking, using public transportation, or swapping your current car for a less-expensive used model with good gas mileage.
  • Earn more. You can cut costs only so much, but your earning potential is theoretically unlimited. If you really want to boost your personal profit, make more money. Go back to school, become a landlord, sell your stuff, take a second job. Of course, as an entrepreneur, you’re already working hard to increase your income.

The biggest barrier between the average person and financial success isn’t ability. It’s psychology. Big wins require effort and sacrifice, which can be tough to stomach. But the sooner you see that these choices aren’t extreme measures but the best way to achieve your financial dreams, the quicker you’ll get out of debt or reach financial independence. The small stuff forms a great basis for behavioral change, but it’s doing the big things that will make you rich.

This is a modified excerpt from "Be Your Own CFO", the 120-page guide included with the year-long "Get Rich Slowly" course. The guide includes tips for boosting revenue and cutting costs so that you can maximize profit in order to achieve your dreams, whether those are to retire early, send your kids to college, or travel the world. Want to know more? Buy it now.

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I recently appeared on the Stacking Benjamins podcast to talk with Joe Saul-Sehy about the Debt Avalanche and the Debt Snowball, two very similar methods of paying off existing debt — usually applied to situations that involve mutiple credit cards. They two approaches differ in one important aspect, and I’ve discussed that in detail on Consumerism Commentary.

You can listen to that podcast episode here. We go beyond the details of debt payoff and discuss the mindset that comes about from being hopelessly devoted to gurus and strong personalities. And one thing that comes out of this mindset is that everyone who disagrees with your particular guru is wrong, doesn’t “get it,” and is jealous of the guru’s success.

I’ll call out experts I disagree with, but when I also find myself leaning towards certain advice, I’ll point that out as well. Gurus, even the most persuasive, can be wrong, and the same gurus can be right. It’s not that all strongly-opinionated authors and seminar leaders are providing bad information, but the nature of these communities is based on groupthink. People lose the ability to make decisions for themselves and see the subtlety in personal situations that destroys the relevance of one-size-fits-all prescriptions.

One thing that I’ve concluded, at least thus far, is that some criticisms of one author’s approach to building wealth, David Bach’s Latte Factor, are unfounded.

I wrote about two invalid criticisms of the Latte Factor yesterday — that time is better spent earning more money than saving money and that frugal people have already succeeded with the Latte Factor but have nothing else to gain from the advice. Today I’ll continue with two more criticisms I find to be incomplete.

3. The purpose of money is to spend it on things that make you happy. If that’s a daily cappuccino, so be it.

First, I’ll take a look at this criticism from the coffee-literal perspective.

Ask someone who relies on a morning latte to get through at least part of the day with their sanity intact, you can imagine the drink is something about which he’s not likely willing to compromise. But maybe having cheaper coffee at home would help him maintain a positive attitude through the morning while avoiding the $8 drink at the name-brand coffee shop.

Perhaps there’s a social aspect to getting coffee at the same shop every day, but if that’s the case, the drink isn’t the important part and can be easily switched with, say, a cup of water. It may just be the fact that you have a daily routine that maintains your happiness, and changing that routine might be difficult at first but will easily become the new normal.

Now, here are my thoughts on this criticism taking a more generalized perspective to the Latte Factor.

There’s no point in improving your bank account balance if you don’t have any ideas for what you’d like to do with your life. Money is not a goal by itself. When you know what the purpose of your money is — some type of legacy you want to leave on the world — you are more inclined to think about your financial choices carefully and make decisions that provide better results in the future.

Happiness is an important piece of long-term goals. And spending money on experiences, not things, is a more efficient of spending money when happiness is concerned. Most people should better understand that happiness is a choice, not an ultimate goal. In fact, happiness comes through the little things in your life on a daily basis, not a state of being that won’t be realized until some other condition is met (such as having a high net worth.)

The idea that happiness is a choice might come close to the same danger I illustrated yesterday, how living situations can be overwhelming to the point that not much philosophical change is possible, but regardless you don’t need a daily coffee to be happy.

The idea that one should continue spending money because it makes one happy is a convenient excuse that allows people to feel better about making bad decisions.

4. Most people who try the Latte Factor aren’t successful.

This is probably the most ridiculous criticism of anything, let alone the Latte Factor. It’s crazy for people to believe they’re better than average or can be more successful than average. And I pointed that out when I wrote about the chances of being a successful entrepreneur earning $10 million from something that starts as a side business. It’s possible, of course, but it’s not common.

But that doesn’t mean you shouldn’t try. Princeton University’s acceptance rate in 2012 was only 8.2% of all applicants. And it’s safe to assume that most of the high school students who bother to apply for Princeton University are already highly qualified to attend. That doesn’t mean that if you are qualified you shouldn’t apply because the chance of acceptance is so low. It’s not that difficult or complicated to succeed at reducing daily, habitual expenses, and by looking at the idea as a philosophy instead of a rule, the concept becomes a part of your life and invites success.

Find internal motivation and you won’t give up.

5. By the time you realize the great savings over a long period of time, inflation’s effect will make that money not worth nearly as much as its sounds today.

There’s some disagreement about how much the Latte Factor can actually save someone. We can easily calculate and define the savings amount on an annual basis, but beyond that, there are too many variables in play for anyone to make an informed decision based just on numbers. If you could save $5 a weekday by avoiding expensive coffee, a trip to Wendy’s, a pack of cigarettes, or some other expense, you’re looking at $25 a week or $1,250 a year (50 weeks). Over twenty years, that’s $37,500 saved.

That’s about where the facts end. You can assume that the $1,200 a year is invested on a monthly basis in a broad stock market index mutual fund in an IRA, the investment increases each year by 3% inflation, and the investment ends up earning an annual rate of 8%, a pretty average for the stock market. With all of those assumptions, your ending balance will be more than $220,000 after 30 years. That sounds great, but inflation eats away at the purchasing power of that money, so $220,000 30 years from now could be equivalent to $97,000 (a figure I determined by using the Bureau of Labor Statistics inflation calculator to compare 2014 dollars with 1984 dollars).

The assumptions are aggressive and leave holes in the calculation:

  • What are the chances that someone will invest all the money they save through the Latte Factor?
  • What are the chances he won’t need to withdraw money from the stock market during an economic downturn?
  • Is the daily “latte” (or whatever the habitual expense might be) just being replaced with another unnecssary daily expense?

There are too many variables to be able to make a prediction. It also doesn’t take into account the positive effect on other areas of your financial life by implementing the Latte Factor. In fact, the calculated savings might be too conservative — that is, you’ll save even more money than the calculation expects — if the philosophy helps you make better, informed decisions about money.

The important point is this. Even if you end up with $100,000 in your “Latte Factor” bank account at the end of thirty years, that’s $100,000 you wouldn’t have had otherwise. And while being successful with a business might generate $1 million, $10 million or more over the same amount of time, there’s no reason you can’t pursue that at the same time you’re being smart about your own finances. And I hate to disagree with the “You can do it!” entrepreneur coaches, but the chances of being successful in business at that level are quite low.

I don’t think any Latte Factor supporter has ever said that the concept of cutting back on habitually repeated expenses is the sole key to building wealth over the long term, but most of the criticisms assume that the philosophy is prescribed as the definitive solution, and those who follow it aren’t capable of taking a multifaceted approach to improving their finances, whether those financial goals include getting out of debt or reaching financial independence. No, $100,000 thirty years from now is not going to make anyone financial independent. That doesn’t mean the Latte Factor fails — it addresses a different concern.

That is the big assumption that drives the criticism. The Latte Factor is a simple concept, but it’s only one part of a larger philosophy. This is just a small part of the fact that people spend money and time on what’s important to them. When people say that saving money or earning more income is important, but spend no time or mental energy working towards those goals, their words disagree with their actions. It’s those actions that matter, like everyone knows.

If you want to be financially independent, but aren’t considering all avenues for reaching that goal, including reducing expenses and earning more money, then you don’t really want to be financially independent. You don’t really want to be out of debt. Or you don’t want these things enough to actually make changes in your life. Everything good is worth sacrificing for.

There may exist legitimate criticisms of David Bach’s Latte Factor. It’s not applicable for all people in all situations, certainly. But these five criticisms come from a misunderstanding of the goals of this frugal approach, bad assumptions inherent among some individuals who implement the advice, or incorrect expectations about the results.

Photo: Flickr

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More than seven years ago, I encouraged readers to forget about the Latte Factor. The Latte Factor — a registered trademark — is the core marketing message from personal finance guru and author David Bach. The concept uses a daily morning latte as a metaphor for all small, habitually repeated expenses, that add up to a lot of money over time. A lot of that money could better serve us by being placed in savings or investing than being spent through an unnecessary habit.

The Latte Factor and its bigger meaning have drawn much criticism. Not all financial experts are interested in encouraging those with advanced financial goals to pay too much attention to small changes. I, for one, have raised my concerns with the relevance of focusing on the Latte Factor for long-term wealth building. David Bach appeared on the Consumerism Commentary Podcast to discuss this financial advice, and he addressed some of my criticisms.

From the discussion with David Bach, from discussions with other financial experts, and through internal reflection, I don’t think there’s anything wrong with the Latte Factor, at least, not as much as other critics think is wrong. Most criticism comes from a misunderstanding of the goals of the approach.

Here are some of those common criticisms, including some of mine, and how the concept behind the Latte Factor still holds up to scrutiny.

1. It’s more worthwhile to spend time earning more income than it is to spend time saving money.

I completely agree with the above statement. Given the sentiment, building your ability to earn more money over the course of your lifetime greatly overshadows the benefits of saving $5 a day. There are good reasons why gurus, particularly entrepreneurial-focused self-proclaimed experts, encourage focusing on income rather than frugality through modified spending habits.

  • “Big wins” generate a strong impact on your ability to become financially independent.
  • Cutting back your expenses has a finite limit — when you reach the bottom level of Maslow’s Hierarchy of Needs expressed in budgets. Earning more income is theoretically infinite.
  • Focusing on building income instead of saving more money has benefits in life other than just increasing your bank account balance.

These are all good reasons for focusing on building income. I think everyone should work on building income if they can. But if you’re concerned that the Latte Factor was born in the “self-help movement” and relies on telling people what they want to hear to encourage action and motivate people to change their lives presumably for the better, the “you can earn more money, and so do I!” approach is even more rooted in those empty, aphoristic motivation techniques that sell millions of books.

The big assumption among those who say, “It’s easy. Ignore the Latte Factor and spend your time earning more money!” is that everyone listening to such advice is a middle-class American: gainfully employed, probably in a nine-to-five office job, a little dissatisfied with work and life, and having extra capacity for turning a hobby or passion into a side job and perhaps even a career.

I want to see one of these gurus walk up to a single mom, working two daily jobs to support a couple of children, juggling school and day care, and tell her, “Turn your passion into an income! Get another job! Work harder!” It’s just not going to happen. Some people can’t make changes to their lives as easily as those who write the books. Getting a better job requires education, education requires time, and time is hard to come by if you’re having difficulty raising your family as it is. The appropriate response to our motivational guru with this particlar gall is, “Fuck you.” (Pardon the French.)

Now, bad circumstances can’t always be an excuse for refusing to put in more effort to increase income. Sometimes being better at a current job is enough to make a little bit of an impact. Small changes in behavior can increase the chances. And some people are just lazy — if they are able to increase their motivation, they could see they have more opportunities than they initially imagined.

There is certainly a good proportion of people who can afford the time and energy to build their income through a better job. And those who can should. But that doesn’t make the Latte Factor irrelevant. You can spend your time and effort earning more money at the same time you analyze your spending and figure out where you can eliminate excess.

The Latte Factor is only one piece of the wealth building puzzle. No one is restricted to either saving money or earning more. The good thing is that once your spending habit is identified, it doesn’t take much effort at all, and still has significant benefits in the long run.

2. Frugal people have already eliminated their daily extras.

This was one of my questions to David Bach. Many frugal individuals and households have already eliminated their daily latte. They’ve already analyzed their spending and cut out what they could. Where does the Latte Factor leave them?

It’s going to be difficult to take someone who isn’t predisposed to a frugal lifestyle and encourage them to successfully adopt frugal strategies. People do change their philosophical beliefs, though not many, and a good number of those who do are frugal only out of necessity, for a short period of time. The loss of a job certainly increases the need to change one’s approach to saving money, but a job loss should only be a temporary situation.

To contrast, changing your approach to money through the Latte Factor has to be a lifelong commitment in order to realize the benefits that are strongly touted, like the purported nest-egg increase of a million dollars over the course of several decades. So if there is a good chance most individuals not predisposed towards frugality will ignore the advice anyway, and a good chance that individuals already considering themselves frugal have already applied the Latte Factor to their lives, why spend so much time and effort discussing the concept?

The Latte Factor is about more than fewer less coffee-related drinks. It’s about eliminating automatic habits and making decisions about money something that happens in the part of the brain that handles conscious decision-making. The philosophy encourages people to think about the consequences of their actions.

This is not only good for saving money, but it’s a positive approach that helps people earn more money, too.

In addition, unless you’ve reduced your life to the bare necessities of food, water, and shelter (Maslow’s Hierarchy of Needs as referenced above), there’s more you can do to save money. It’s just a question of how far you’re willing to go to adjust your lifestyle in exchange for long-term savings. Some changes, and perhaps the compromises you make in your happiness, may not be worth the savings, but that’s a decision you can make only once you’re able to fully evaluate the situation.

The Latte Factor encourages people to switch from automatic mode to conscious mode when dealing with financial situations. It doesn’t matter if that philosophy is put into effect through refusing expensive coffees, avoiding the fast food restaurant for lunch each day, cooking meals instead of eating in the office cafeteria, or quitting smoking.

Of all the criticisms of the Latte Factor I think go too far and miss the point of using a philosophical adjustment to change behavior and improve finances, these are just two. I will share three more tomorrow that focus on the happiness derived from daily habits, the “most people fail” criticism, and the erosive effect of inflation that helps overstate the financial benefit of saving about $5 a day.

Photo: Flickr

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Want to Fail? Ignore Survivorship Bias.

by Luke Landes
0000974d1

Whether you’re making a decision that has apparent, immediate consequences that could affect the rest of your life, like deciding to quit your job and open a business, or making a purchasing decision big or small, it is worthwhile to gather information and think about the future. When you gather information, you have to be ... Continue reading this article…

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Home Grocery Delivery: Peapod vs. FreshDirect

by Luke Landes
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Although I don’t take advantage of this type of service every time I need to go food shopping, grocery delivery is one luxury I enjoy about once a month. I’ve been a customer of Peapod for about eighteen months. Peapod is a company associated with Stop & Shop, a supermarket in my area. The food ... Continue reading this article…

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The Only Way Buying As Much House As Possible Is Smart

by Luke Landes
Buying as much house as possible

Once again, I’m finding myself nearing the end of my one-year lease with the need to make a decision about my living situation. I moved to my current apartment in the summer of 2007, at a time when I had been more comfortable living off some of the income from my business. Until that point, ... Continue reading this article…

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by Luke Landes
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The realist in me recognizes that the best plan for getting out of debt is any plan that allows someone to achieve that goal. The realist is constantly at odds with the optimist in me, the part of me that wants people to be high achievers, to strive for excellence, and to seek an informed ... Continue reading this article…

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Buying and Selling Stocks Is Often a Losing Strategy

by Luke Landes
Grow Your Dough Throwdown - March 2014

After three months, my $1,000 investment portfolio, nicknamed “Feemaggeddon,” is lagging. This portfolio is part of an investing challenge, the “Grow Your Dough Throwdown.” It’s a lighthearted competition featuring several top financial bloggers. I have two goals with this portfolio. The first is to test a specific popular investing philosophy. Among those who offer advice ... Continue reading this article…

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Naked With Cash: Laura and Leon, February 2014

by Luke Landes
Laura and Leon - Naked With Cash 2014

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

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