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Financial Advice and Advisers

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


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


Some feedback over the nine years of writing about money on Consumerism Commentary indicates that there are some readers — not necessarily daily readers and fans of a website, but those who are searching online about some finance-related topic and are at best passing by any particular website — are looking for quick answers. People want to be told what to do instead of making a choice on their own, or they want to confirm or affirm that a particular financial decision was a good one.

I’ve never been a fan of flatly telling people what to do, particularly when it comes to financial advice. Financial advice is personal, and it’s difficult to prescribe specific actions to a mass audience. Groups are composed of individuals, and every person has his or her own situation that might differ from the average. Some generalized financial advice fits all sizes and situations, but when you get to the more interesting aspects of personal finance or begin examining the details, that’s not always true.

Motivational speakers who focus on finances succeed — and their success is often defined by their profit from seminars, books, and other products sold to consumers who should probably be saving their money — because there is a great audience of people just waiting for permission to take action. At some level, they know it’s good to focus on their personal finances, but need someone to inspire the first step with a push.

Depending on the motivator, that push might take the form of a big “DENIED” graphic flashing on the television screen or some actionable information about investing in real estate. Regardless of the form, it has the capacity to inspire thinking about personal finance, if it doesn’t permanently damage the listener’s psyche or portfolio. But the more popular the guru, less of the action is a result of thinking and more of the action is a result of blindly following.

I’ve tried to focus on the thinker, and that approach has done well to shape the Consumerism Commentary audience over the years. I certainly have my opinions, but — and perhaps this prevents me from generating a rabid fan base (and I have no problem with that) — I prefer to keep myself out of the advice except occasionally sharing my tempered opinion or stories from my own related experience. I can offer two sides of an argument when there are valid points on both sides, and I try to present them in a way that helps readers consider their own situations and make their own decisions.

Once in a while, I receive a comment in response to a contemplative article like, “I wish you would just tell me what to do.” I want to respond, “I’m not your dad.” Not to bring a cliché into the discussion, but isn’t it better to teach a man to fish than it is to give him a fish? To me, that seems to be the point of education. Provide people with the tools they need to make their own best decisions rather than telling them what to do.

When talking one-on-one, it’s much easier to analyze a situation and provide individualized advice, but when discussing a general issue online, that’s more difficult.

A good way to address the problem of finding answers that are applicable to everyone is to address one specific situation at a time. Given enough situations, readers can often relate to at least one. This is the approach Liz Weston has taken in her latest book, There Are No Dumb Questions About Money, available on the Kindle and from iTunes. The book features many of the questions — describing specific financial situations — Liz has received over the years. Readers of the book are sure to find situations described within that match their own. I’d be happy to take specific financial questions as well. Those I can answer, I will, and for those that require someone who is more of an expert than I am, I will seek an answer from a professional.

It’s a win-win situation, as corporate motivational speakers might say. Questions provide me with great ideas for new articles, and readers receive advice for overcoming their financial obstacles or for making better financial decisions. When it comes to writing for a wider audience, however, I feel I have the responsibility not to tell people what to do, expecting them to blindly follow these suggestions. Being an adult in a society where education is valued is all about thinking for yourself, consulting experts when necessary, and making the best decisions, on your own, that are best for you.

This can certainly be difficult when salespeople are disguised as experts. When you don’t have a lot of friends who understand the mortgage industry, for example, you rely on the bank’s advice for making decisions. If the bank says you qualify for an expensive mortgage and they show you some calculations, however flawed, to prove their point, you trust them. Then you might find yourself in financial trouble when interest rates increase, tax rates increase, or your home loses its market value.

You want to blame the bank, and in some cases, you were misled and you can, but for the most part you have to own your decisions. You can better own those decisions if you are willing to exercise the mental capacity to analyze your situation and the choices confronting you. That’s why I don’t often prescribe a course of action.

There are guidelines, however, that tend to work well regardless of specific situations. Start saving and investing as early as possible. Minimize expenses and maximize income. Spend less than you earn. These are just guidelines, though, and not very specific. Once you start getting into the details, how you go about changing your actions and attitude depend on your individual situation.

People may be looking for a simple answer to questions like, “With some of my extra cash flow, should I invest more or pay off my mortgage.” I can give a simple answer. I could say that the best choice is always to invest more, and I can cite enough supporting evidence to back that statement up with facts, statistics, and reasoning. I could advise readers to pay off the mortgage and have other facts, statistics, and reasoning to support that answer. There are other details you need to know to give informed advice to any household considering this question, however. If you really want the best answer to this question, you would need to share more information, starting with the following:

  • What is the interest rate on the mortgage?
  • What is your preferred investment?
  • How much time do you have left to pay off the mortgage?
  • How averse are you to risk?
  • What type of return are you expecting on the investment, and do your expectations have a good chance of being accurate?
  • What other financial obligations do you have?
  • How much time do you have left before you’d like to retire?

I don’t see how anyone can offer solid advice without answers to these questions to start, yet people are looking for a quick answer, such as, “It’s always better to pay off your mortgage faster rather than invest when you have extra cash available.” Financial writers can say that, or they say the opposite, but it really doesn’t help anyone in the long run.

To everyone who has come to Consumerism Commentary looking for a quick answer to a complex financial question, I apologize. I may take that approach sometimes, and when readers offer specific questions with enough detail I might entertain one-on-one advice, but when it comes to larger issues affecting a group I am much more likely to consider all sides and encourage readers to analyze their own situations with a little more perspective. With the expanded perspective, readers are better prepared for making their own decisions and taking responsibility for their actions.

As an aside, I don’t always temper my opinions. I’ve been very outspoken about the Debt Avalanche (which as far as I know, is a term coined by me, though the concept certainly existed before) method of paying off credit card debt. I’ve pressed this issue because a strong opinion is necessary to counter the massive marketing machine behind what is known as Dave Ramsey’s Debt Snowball approach. I don’t intend to get into the details here; visit those articles for discussions about why.

Photo: A Roger Davies


Last week I met with a Certified Financial Planner for the first time. This was a free service provided by Vanguard, so it was a good opportunity to speak to a professional about my specific situation. For many years, I’ve been relying on mostly generalized advice, whether from books, large communities like the Motley Fool discussion forums (particularly the Living Below Your Means section), financial columnists, or a community of bloggers that has grown from fewer than a dozen to more than a thousand.

My financial planner and I started by discussing my goals. This was tough for me, as I’ve changed my long-term goals several times in the last decade. I’m trying to find the right mission for my life. I’ve made personal finance my passion since the creation of Consumerism Commentary in 2003, but long before that date I was passionate about other aspects of my life. I need to look at how I want to spend the next twenty, thirty, or forty years of my life and some of the more important developments along the way, like having a family.

From a financial standpoint, my next major expenditure will most likely be a house, though that purchase relies on making other choices in my life first.

With my current level of investable net worth — my assets outside of an emergency fund and money put aside for shorter-term goals like a house — I’m willing to give up potential returns in the stock market for less risk. We decided on a mix between 60% stocks and 40% bonds. Complicating the issue is the fact that almost all of my non-cash investments are in stocks. It will be important to look at my portfolio as a whole rather than analyzing my 401(k) separately from my IRA and separately from my taxable account. This is where tools like Quicken, offering charting and reporting across a variety of accounts regardless of where they are held, come in handy.

The 60%/40% split between stock funds and bond funds is more conservative than I would generally recommend for someone my age (thirty-five), but that might be appropriate based on my lower needs for long-term returns and need for maintaining value in the intermediate term as I determine the next steps for my life.

Before discussing specific investments, I made sure the planner was aware that I prefer index mutual funds rather than ETFs, managed mutual funds, or individual investments. The planner suggested that 70% of the stock portion of my portfolio be invested in the Total Stock Market Index with the remaining 30% in the International Stock Market Index. Half of the bond portion of the portfolio should be invested in the Intermediate Tax-Exempt Bond Fund with the other half in the New Jersey Tax-Exempt Municipal Bond Fund. I’m not sure how excited I am about the prospect of investing in New Jersey, but the tax advantage could be helpful.

I brought up the issue of tax efficiency. It was my understanding that tax-efficient investments, such as the bond funds recommended, should be invested in taxable accounts, while investments that did not offer any tax advantages should be invested in retirement plans like 401(k)s and traditional IRAs, where the tax is deferred until retirement. After analyzing my tax situation, the planner concluded the opposite would be true, admitting the idea seemed counter-intuitive. In today’s environment, the tax rate for qualified dividends, the result of stock-based mutual funds, is 15%, while income from bond-based mutual funds is taxed at ordinary income rates.

However, the bond funds he suggested to are federally tax-exempt, and one is also state tax-exempt as long as I continue living in New Jersey. The adviser’s suggestion to invest in bonds in my tax-deferred retirement accounts might make more sense if those investments were not tax-exempt. I think there’s a piece of discussion missing from my notes that might have explained this situation with a more satisfying rationale. I’ll seek a second opinion about this particular aspect of my planning.

With most of my portfolio in cash, the planner suggested moving these funds to stocks and bonds slowly, over the course of eight quarters. Leaving behind any amount I’d like to have let in cash at the end of two years, I would divide the remainder by eight to determine my quarterly investment amount. This method of dollar-cost averaging could ease the pricing risk inherent in investing a lump sum.

If my goal is only to have money for retirement, my time horizon would be long. Again, I’ll need to define some of my life goals to determine time horizons for specific pools of assets. That would be a topic for a later discussion.

In summary, these are the main points of our discussion:

  • Six months to one year of living needs in cash, including an emergency fund and any other spending needs.
  • With the rest, a 60%/40% split between stock funds and bond funds.
  • Using a dollar-cost averaging investing strategy over the next eight quarters for current funds.
  • Add the bond fund portion to 401(k) investments and stock fund portion to taxable investments.

What do you think of this strategy?


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The Path to Mediocrity: Doing What Works For You and Other Self-Limiting Philosophies

by Luke Landes

General advice for an imaginary average person Personal finance advice comes in many forms, running the gamut from Dave Ramsey’s philosophies on getting out of debt to Suze Orman’s no-nonsense anti-stupidity spending advice. Opinions vary wildly as you stroll down the promenade from the broker, a salesperson, to the financial planner paid by the hour ... Continue reading this article…

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