As featured in The Wall Street Journal, Money Magazine, and more!

Featured

The concept of the Latte Factor is one of the most divisive in personal finance. Money gurus get so worked up over whether the Latte Factor is a valuable lesson in money management, that one might think the issue were as important as the national debt. Most of the time, passionate responses pertaining to the Latte Factor are based more on book sales and page views than any rational consideration of the issue, though.

latte

The Latte Factor is a term coined and trademarked by financial author and guru David Bach. He posits that small, repeated savings — of which people can make into habits — can aid the growth of wealth over time. The math supports this as truth: Assume you spend five dollars every weekday on a fancy, coffee-related drink on the way to your office. Now, imagine you cut out the coffee, or replace it with a $1.50, less-fancy drink. You would save at least $20 a week, or about $1,000 a year.

Take it a step further and put that money in a bank or invest it. Then, assume that you can earn a return from interest, dividends, or investment gains on that cash. Over the next ten years, you’ll have somewhere in the neighborhood of $15,000 more to your name than you would have, had you continued buying your daily gourmet drink.

Take it a step furtherLatte Factor Coffee

This concept isn’t limited to expensive coffee-related drinks, though. Any habits that result in spending money that could be deemed unnecessary can qualify for elimination due to the Latte Factor. Cook your own food rather than dining out once a week, and you could save just as much money (or more) over the same period. Cut out your premium cable package in exchange for Netflix or Amazon Prime streaming, and tuck that cash away.

Most people, however, don’t bridge the gap between reducing spending in one area and increasing savings with the difference. Unless there’s a concerted, conscious effort to transfer money from a checking account to a savings account or an investment, the money formerly spent on lattes or other repeatable expense will often just be spent on something else.

Furthermore, families that have already reduced their spending due to personal or economic situations may not have much room left to scrape the barrel. Finding additional savings can be too much to ask.

Yet another criticism of the Latte Factor is that it minimizes the importance of reducing large expenses. If a family gets into the habit of saving money ordinarily spent on lattes and uses that attitude to justify buying a more expensive car, all the work will have been for naught.

Well, I take that back: the work would have been for a more expensive car. But, in my opinion, there are about 100 better uses for that extra, squirreled cash.

Do what works for you

All spending is a choice. It’s easy to remember this when a friend refuses to spend time with you, citing the expense of the activity, while they continue to purchase unnecessary electronics equipment, for example. You can identify someone’s priorities by looking at how they choose to spend the money they have and the time they have available. If you look at your own priorities, your budget should match.

Whether you realize it or not, you’re broadcasting your priorities to the world. Spending money and time in one area of your life, at the expense of another area, is really all the evidence you need. If there’s incongruence between the priorities you think you should have and how you spend your time and money, consider changing something. Or maybe, you need to accept the idea that your priorities may not be what you expect. Your real priorities are evidenced by how you spend your limited resources.

So, what if the pick-me-up you receive by drinking a fancy latte in the morning is important to you? As long as you realize that your habit results in a hypothetical “loss” of $10,000 or more over the course of ten years, spend the money. Sure, buying a practical car that requires little care, uses fuel efficiently, and will last a long time can save money over the course of several decades. But if buying a less practical car makes you feel happy and won’t be a financial hardship — even if it means leasing a new car every three years — then go ahead.

Just remember, though: Your spending reflects your priorities.

I see this in my own spending. For example, I still drive my old Honda Civic. In one respect, I haven’t purchased a new car because I see it as an unnecessary expense. I’m more than comfortable with keeping the money I would need to buy a new car in my savings account. Meanwhile, I spend money on things other people would see as frivolous, such as photography classes and equipment, hiring a maid service for my apartment on a bi-weekly basis, coin collecting (though not much recently), and travel.

Is the Latte Factor relevant to your personal finance experience? What does your spending say about your priorities? 

{ 16 comments }

Most taxpayers can choose between itemizing tax deductions to reduce taxable income, which requires accurate record-keeping and support, and taking the standard deduction. The standard tax deduction is a fixed amount that reduces the amount of money on which year-end taxes are calculated. Generally, if you can show that you’ve had more deductible expenses than the amount of the default standard deduction, it’s better to itemize.

IRS publication 501 outlines each year’s deduction amounts. There are some cases where adjustments should be made to the standard deduction. For example, if you are 65 or older, or if you are blind, the standard deduction increases.

The standard exemption is another deduction to your income that you can take for yourself and for any dependents.

Tax Year 2017 2016 2015 2014 2013 2012 2011 2010 2009
Single $6,350 $6,300 $6,300 $6,200 $6,100 $5,950 $5,800 $5,700 $5,700
Married filing jointly $12,700 $12,600 $12,600 $12,400 $12,200 $11,900 $11,600 $11,400 $11,400
Married filing separately $6,350 $6,300 $6,300 $6,200 $6,100 $5,950 $5,800 $5,700 $5,700
Head of household $9,350 $9,300 $9,250 $9,100 $8,950 $8,700 $8,500 $8.400 $8,350
Personal exemption $4,050 $4,050 $4,000 $3,950 $3,900 $3,800 $3,750 $3,650 $3,650

Note: When you file taxes in April 2017, you’re actually filing for your 2016 earned income. Review the numbers in the 2016 column and understand the federal tax brackets.

A dependent child can increase the standard deduction by as much as $1,000, if certain requirements are met.

Do you itemize your tax deductions or take the standard deduction?

{ 23 comments }

The U.S. Postal Service could offer basic banking services to customers, many of whom do not have reliable and affordable access to mainstream banking products like savings accounts and forms of credit.

From the moment I heard this, it sounded like a bad idea. Not long ago, discussions about the U.S. Postal Service focused on the question of ending delivery on Saturdays, the closing of 700 retail locations, and the elimination of the U.S. Postal service entirely. And now, there’s a proposal with studies claiming legitimate benefits across the board for expanding the services offered by this semi-private, semi-government entity.

The U.S. Postal Service has a weird existence. It is an independent government agency that operates like an independent corporation, but it is subject to congressional interference, oversight, and direction. USPS is not funded by tax revenue, yet the government still directs how the organization’s revenue is spent.

Providing the U.S. Postal Service with another profit center, like the ability to profit from basic banking services, might help the organization grow in strength.

The domestic precedent for banking at the post office.

In 1907, the United States suffered an economic recession, and this crisis was followed by a “panic” in 1910. The American public reacted by losing trust and faith in the banking industry, and in a bid to get money moving through the economy again, the Post Office began offering savings accounts in 1911. This made basic banking services available to working class people, who felt either abused or ignored by the financial industry. The savings account earned depositors 2% interest, while the post office earned 2.5% interest on the deposits by investing them with the mainstream financial industry.

The Postal Service continued offering deposit accounts through 1967, but still continues offering money orders, which allow customers to send money in cash form relatively securely from one location to another.

The social environment that spurred to government to allow the USPS to start offering banking services exists today. According to Elizabeth Warren, a senator who is in favor of expanding the Postal Service’s relationship with retail money-handling, “… [T]he average underserved household spends roughly 10 percent of its annual income on interest and fees — about the same amount they spend on food.”

The poor is spending too much money on non-bank financial services like check-cashing and payday loans. Poor communities turn to predatory, high-cost financial services because they don’t have many choices. Banks — and even credit unions, which are thought to better support local communities — do not set up retail locations in economically-stressed neighborhoods because it’s not profitable. There’s little trust in either direction between the banking industry and poor communities. Even if convenient retail locations did exist in high-poverty locations, customers would not walk through the doors.

But everyone goes to the Post Office or receives deliveries from a letter carrier. While the USPS reach in rural locations isn’t great, delivery services touch almost every household in the country, regardless of socio-economic status. If the U.S. Postal Service is able to offer check-cashing and small loans, and perhaps limited deposits again, and able to offer such services at a lower cost than what is currently available, it could mean a better lifestyle for those living in tough financial situations.

The foreign precedent for banking at the post office.

Other countries have successfully implemented similar models.

  • In Australia, you can bank at the post office. Australia Post works in partnership with the financial industry to accept deposits and make withdrawals and pay credit card bills.
  • In the United Kingdom, the Post Office offers banking services that compete with retail banking, and has recently expanded their selection of banking products. The Post Office in the UK is structured differently, with a different service that handles delivery and collection of mail (the Royal Mail), and both are now private companies than they are government agencies.
  • La Poste in France has its own banking subsidiary, La Banque postale, and post offices in that country offer banking services.
  • Poste italiene in Italy, which was once a government-owned monopoly but is now a public company under government control, offers financial products such as savings accounts and prepaid cards.
  • The postal service in Japan, again a former government agency that has gone through privatization, offers a variety of financial services including savings accounts, government bonds, investments, and loans.

The banking industry isn’t a fan of the idea.

Banks don’t want competition from outside their industry. Competition of this kind is a threat to the reputation of the industry, especially when an organization as unhealthy as the U.S. Postal Service can come in and undercut their pricing. A recent article in American Banker, the trade publication of the American Bankers Association poked fun at the idea that the USPS could serve poor communities better than the financial industry with “15 reasons why the post office should stay out of banking.” Each “reason” was a Tweet in which a Postal Service customer complained on Twitter about an interaction with the mail or an employee of the post office. The 15 reasons were in fact just one: poor customer service.

Customer service is a legitimate complaint. It seems far-fetched to take a work force that already seems displeased with the responsibilities they have and introduce more services. They will need training. They will need more staff to handle larger volumes of customers. The proposal could take a generally bad customer experience and make it much worse.

But the postal service does not hold a monopoly on bad customer service; in fact, the post office and the financial industry are roughly tied in the American Customer Satisfaction Index (ACSI). When it comes to pointing out customer service issues, the banking industry can sit back down.

Some in the U.S. Postal Service approve of the idea.

The U.S. Postal Service Office of the Inspector General released a white paper with research about and support for the idea. The Postal Service considers itself to be one of the most trusted companies in America (citing the Ponemon Institute’s survey which named the USPS the fourth most trusted company in the United States), but the organization isn’t usually included in surveys of the most trusted private companies because the USPS isn’t fully private. If the Post Office is trusted much more than companies in the banking industry, it is well-positioned to handle consumers’ financial responsibilities much better than banks.

The Postal Service is well positioned to provide non-bank financial services to those whose needs are not being met by the traditional financial sector. It could accomplish this largely by partnering with banks, who also could lend expertise as the Postal Service structures new offerings. The Office of Inspector General is not suggesting that the Postal Service become a bank or openly compete with banks. To the contrary, we are suggesting that the Postal Service could greatly complement banks’ offerings. The Postal Service could help financial institutions fill the gaps in their efforts to reach the underserved. While banks are closing branches all over the country, mostly in low-income areas like rural communities and inner cities, the physical postal network is ubiquitous.

Here’s the bottom line. The banking industry has no interest in expanding services to cover poverty-stricken communities and households and those households have no interest in dealing with the banking industry. At the same time, the poverty needs financial services, and they are restricted to their only, expensive options like payday loans and check-cashing storefronts. These products exist because there is a need for them — or for something. So far, this has been the only profitable, and thus sustainable, way to bring financial services to certain communities.

If we can leverage an existing infrastructure to reduce the cost of financial service for the poor, and reduce their financial burden at the same time, it’s worth looking into. The U.S. Postal Service is not always the example of a perfect organization, but it is not any worse than your average bank. Despite closures, the Postal Service has the infrastructure in place to better reach communities underserved by the financial industry. Any other method of expand financial services would require a much bigger investment in infrastructure and would not be financially viable.

The U.S. Postal Service should begin to offer basic banking services, like savings accounts and prepaid debit cards. The financial industry doesn’t need to see this as competition, because the primary target customer isn’t interested in working with a bank, anyway. The Postal Service could partner with the industry behind the scenes to take advantage of the financial infrastructure that already exists. A relationship is possible, and rather than fight society’s attempts to better serve the underserved, the financial industry should welcome any kind of innovation that would help bring banking to lower classes.

Eventually, as households in poverty become better acquainted with financial products, they will become better customers for banks, even if it takes a generation for that to take hold.

Photo: Flickr

{ 13 comments }

An article on The Atlantic brought new research on the growth of income inequality to my attention. The article explains that the cause of today’s income disparity between the wealthy and the rest of the country is explained by the plot of the film When Harry Met Sally — or the increasingly common occurrence of marriages containing individuals well-matched on two specific factors: socio-economic status and education level.

The paper with the new research is available from the National Bureau of Economic Research.

Over the past five decades, men and women are more likely to wed partners who are in the same socio-economic status group. As more couples fall into this kind of homogeneity, a feedback effect takes place. In fact, society today is more like it has been throughout most of history, where classes determine socialization and procreation, building generational wealth. The culture in twentieth century United States stands out as a contrast to most of Western history because the equal rights movement and other social causes temporarily shifted the country’s consciousness, and disenfranchised communities sought ways to improve their chances of becoming a part of the middle class machine from a societal perspective.

Europeans came to America before this country’s founding for a variety of reasons, but one of these was economic freedom. Although many European countries had made inroads towards economic mobility, Europeans with wealthy parents but no inheritance would get the opportunity to thrive in a new country. And for the most part, this worked out well for them. Many of the descendants of early settlers have held onto generational wealth obtained primarily by being the first Europeans to occupy land on this continent.

This particular American Dream hasn’t worked out as well for the subsequent immigrants to this country, which things getting progressively worse for each successive wave of immigration, but the earlier a family arrived in the United States, the better chance they have of being part of the wealthy class today.

Until this point, the availability of economically-compatible spouses were somewhat limited. People married their neighbors. Parents and community leaders arranged marriages (or just made suggestions) for their children based on compatibility factors that made sense for those families or communities. It was common in this country for a man with a good, upper middle-class job to marry a woman from a poorer family. Or his secretary.

Over the last fifty years, four specific societal changes affected the choices people had in a mate.

1. Socio-economic situations have become more complex.

Upward economic mobility became more of a reality not just for white European male immigrants, but for women and other non-white men. Men and women began working at the same companies, at the same levels. Today’s result of this advancement for women is that we have corporate Vice Presidents who marry other corporate Vice Presidents. We have managers marrying other managers.

And why not? People with similar roles have much in common, making a marriage more social than perhaps has been the traditional case. People with similar roles also have similar independent incomes.

2. Travel is easier and more affordable.

While historically, familial relationships were limited to the confines of a community, distant communities are now closer together. Cars are prevalent, so it doesn’t take long to get from one city to another. Travel by airplane, despite what seems to be an non-stop rise in airfares, is more affordable, and long-distance relationships are possible.

Also aiding long-distance relationships are advancements in communication technologies. While nothing is better than being with your loved one in person, a couple can now stay in virtual constant communication regardless of where in the world they might be.

3. Social acceptance of non-traditional unions is more common.

American society still has a long way to go before racism is no longer a major concern, but there used to be a time in many states during which racial intermarriages were illegal. The Supreme Court rules that no state could instate such a discriminatory law, and this, the eventual social acceptance of such relationships, and other changes in the workforce that gave more opportunities for non-white workers to succeed, increased the pool of potential mates.

And the eventual acceptance of same-sex marriage continues on that path; more and more, people will be able to (legally, with all the benefits thereto, and with societal acceptance) choose to spend their lives with partners with very similar backgrounds, instilling homogeneity for future generations.

4. Everyone has an opportunity to go to college.

For the most part of the last century, society in the United States has been promoting college. Through the GI Bill, easy access to loans for tuition, and employers who value a college degree, more and more citizens of the United States have been attending college. And an increasing proportion of these university students are women.

While it has always been the case that college graduates tend to marry other college graduates, these used to comprise just a small percentage of all relationships. Again, social trends over the past fifty years have changed the landscape. College degrees are much more common and men and women have an easier time finding compatible partners who are also college educated.

These four changes to society in the United States have widened the pool of available partners who are compatible in education and socio-economic status. This compatibility is not a bad thing. If I’m going to share my life with a partner, I would be expect to be able to communicate about issues that are important to me, and for her to be able to express her ideas intelligently — my hope is that she would challenge me intellectually.

Add this into the new American Dream, which seems to be to pursue individual wealth regardless of others, and you have people who seek out partners along compatibility dimensions such as wealth and education. Because of equal opportunity across sex lines, those types of relationships are more available than they were during the period of this country’s history with the most economic mobility, 1960 through 1980.

The promise of equal opportunity in the workforce for women started in the 1960s, but wasn’t realized or culturally significant until the 1980s. The evidence may be in popular films from the 1980s, depicting more women in traditionally male working roles and with higher education, and of course, in When Harry Met Sally.

If you’re born to a poor family today, the biggest likelihood for your future is that you will stay poor. That’s more like most of Western history than it is like the United States that became the major world power in the twentieth century. Working hard, going to college, and entering the middle class is one way to escape the cycle of poverty or near-poverty, but most will fail. The biggest traditional chance of giving your future children a chance for success is to marry someone wealthy, but more and more, the wealthy are finding their own kind.

Do you and your partner have similar education and socieo-economic backgrounds?

If you’re not married and you are looking for a partner, is this part of your considerations?

{ 10 comments }

2014 Federal Income Tax Brackets and Marginal Rates

by Luke Landes
Taxes

Anyone who likes getting a look at their future tax expenses might be interested in seeing what next year’s tax brackets and tax rates will be. The IRS has now announced the official rates and brackets for 2014, although the numbers have been predicted for months because the IRS uses a simple process of inflation […]

12 comments Read the full article →

How the Affordable Care Act (Obamacare) Will Affect My Insurance

by Luke Landes
Nurse with Blood Pressure Intstrument

In just a few days, one of the major provisions of the Affordable Care Act will go into effect. The health insurance marketplace will open. The public discussion about this marketplace and about Obamacare overall is full of partisan politics, so it’s difficult to see beyond the rhetoric and get an idea of what this […]

11 comments Read the full article →

How to Save Money Without Worrying About Coupons

by Luke Landes
Coupons

The retail industry has everyone fooled. While millions of people spend their time scouring for deals, clipping coupons from the newspaper if they’re old-fashioned, plugging into the latest mobile deal applications if they are somewhat more technologically inclined, sharing their finds on Facebook to recruit friends for group deals, the companies on the other side […]

14 comments Read the full article →

8 Reasons to Sell Your Business

by Luke Landes
Handshake in suits

I was an entrepreneur by accident. When I started blogging in 1994, I didn’t expect to earn money; I wasn’t even trying. But almost ten years after building my first website, I created Consumerism Commentary to learn about personal finance and to improve my own money situation. Within about a year, much to my initial […]

11 comments Read the full article →

Many Low-Income Families Can’t Use Mainstream Banking Even If They Wanted

by Luke Landes
Bank

I’ve written previously about many different reasons households, particularly those in locations where families typically have low incomes and those in areas where certain minorities constitute a majority of households, are more likely to take advantage of the high-cost alternative banking system including payday loans and check-cashing storefronts. For example, traditional banks find it difficult […]

13 comments Read the full article →

Don’t Take Budgeting Advice From McDonald’s

by Luke Landes
McDonald's ridiculous budget worksheet

I had planned to write about McDonald’s ridiculous budgeting tips for employees when I first saw the news circulating through social media. I’m so far behind with my editorial plan that every last Consumerism Commentary reader has probably heard about this latest manifestation of corporate ignorance of reality by now. Writers of all stripes and […]

23 comments Read the full article →
Page 1 of 1212345···Last »