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The Latte Factor: Your Spending Reflects Your Priorities

This article was written by Flexo in Frugality. 8 comments.

The concept of the Latte Factor is one of the most divisive issues 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 war, the national debt, or capital punishment. Most of the time, passionate responses pertaining the the Latte Factor is based more on book sales and pageviews than any rational consideration of the issue.

The Latte Factor, a term coined and trademarked by financial author and guru David Bach, posits that small, repeated savings, of which people can make habits, can aid the growth of wealth over time. The math bears this out to be true: Assume you spend five dollars every weekday on a fancy coffee-related drink on the way to your office. If you cut out the coffee or replace it with a $1.50 less-fancy drink, you save at least $20 a week or maybe a $1,000 a year. Put that money in a bank or invest it, and assume you can earn a return from interest, dividends, or investment gains, and over the next ten years you’ll have $11,000 to $16,000 more to your name than you would have, had you continued buying your daily gourmet drink.

Latte Factor Coffee This concept isn’t limited to expensive coffee-related drinks. 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 dine out once a week, and you could save just as much money or more over the same period.

Most people, however, don’t bridge the gulf 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 just be spent on something else.

Furthermore, families that have already reduced their spending due to tough economic conditions that have become personally relevant may not have much room left to scrape the barrel to find additional savings.

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 nothing.

Well — the work would have been for a more expensive car. 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, but mostly to yourself, by spending money and time in one area of your life at the expense of another area. If there’s incongruence between the priorities you think you should have and how you spend your time and money, consider changing something or accepting the idea that your priorities may not be what you expect. Your real priorities are evidenced by how you spend your limited resources.

If the pick-me-up and self-esteem you receive by drinking a latte in the morning is important to you, and you realize your habit results in a hypothetical “loss” of $10,000 or more over the course of ten years, spend the money. 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. Your spending reflects your priorities.

I see this in my own spending. 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 and I’m 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 schedule, 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? Relevant responses to this article are worth twice as many points as usual. If you are a registered Consumerism Commentary visitor, you can earn points by participating in discussions to redeem for Amazon.com gift cards.

Photo: RaeAllen

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Avoid These Big Money Wasters

This article was written by Flexo in Frugality. 17 comments.

CNN is offering a compilation of the ten biggest money wasters. These items would be obvious to most loyal Consumerism Commentary readers, yet it would not be out of the question to disagree with some of these money-wasters in some circumstances.

ATM fees. You shouldn’t be surprised that banks will charge multiple fees for the same transaction. If you use an ATM that isn’t operated by the bank that houses your account, the ATM owners will often charge for the transaction — as much as $5, Chase’s new ATM fee — and your bank could charge you for the transaction as well. This is why, even though I strongly recommend high-yield savings accounts that are often operated by online-only banks, it doesn’t hurt to have your primary checking account at a bank that has convenient ATM locations. While many online-only and some traditional banks will reimburse you for ATM fees charged by another banks, receiving this reimbursement could be a hassle.

I visit an ATM about once every two weeks. For me, I save $130 a year by not patronizing an ATM that charges $5. According to the source quoted by CNN, many people could stand to save $500 a year by ensuring they visit free ATMs.

Lottery tickets. For the most part, people who play the lottery tend to have a lower socio-economic status, perhaps those who think that winning the lottery is the only hope of financial freedom. The odds are stacked against winning a lottery jackpot, and if the money used to buy lottery tickets was set aside in an interest-bearing account, there is a better chance for strong finances later in life. That doesn’t stop office pools from buying lottery tickets when the jackpot is sufficiently high, however, and in some cases, income from lotteries run by states can be put to some good.

According to CNN’s source, typical lottery participants spend $520 to $1,040 a year on tickets. Another downside to lottery tickets: buying lottery tickets on your credit card can reduce your credit score.

Gourmet coffee. I’m not a coffee drinker, but I can understand why people pay $1,000 a year in order to help wake themselves at a certain time. The obvious resolution would be to save money by switching from the more expensive brands to coffee you brew yourself. This is the basis of David Bach’s Latte Factor, which illustrates how incremental savings can lead to significant increases over time.

Cigarettes. How much money you could save by quitting smoking depends on how much you smoke and how much it costs to buy each pack. In New York, a heavy smoker could save a whopping $13,000 a year! That’s just on the cost of buying the cigarettes; if you quit smoking, doctors say you will live a healthier life and a reduced risk of cancer, so being a non-smoker will result in lower health care bills over your lifetime, as well as lower life insurance premiums in some cases.

Infomercial impulse buys. According to CNN’s source, most infomercial purchases go unused. It’s not just infomercials — any impulse purchase or anything you buy that you end up not using is an unnecessary cost. I have some kitchen appliances that I have not yet used, though I hope to some day. I didn’t buy these from infomercials, but the result is the same. One way to beat this is to stop yourself from making the purchase without a night — or perhaps a week or a month — to think about it. I ended up not purchasing many things I thought I needed, after deciding to wait some time before completing the purchase.

Brand-name groceries. In many cases store-brand or generic items are of the same quality as brand-name items in the grocery store. I’m not a fan of all generic items. For example, I prefer Cotonelle over store-brand toilet paper, because I have yet to find a satisfying alternative. But rather than blindly go with name brands, I buy cheaper alternatives to discover where I am willing to compromise — if any compromise is necessary — to get buy with a lower price.

Eating out. This is a category of spending I’ve struggled with. (See my comment about unused kitchen appliances above.) For the most part, I have only myself to feed, and the healthier groceries are designed for multiple servings. As a result, I either overeat or buy the less-healthy options. I’ve improved my habits a bit, but this is something I still struggle with. Furthermore, when I spend time with my girlfriend, we often find it easier to go out to eat rather than cook for ourselves.

CNN also mentions bars and alcohol in this category. While I’m not interested in bar-hopping, the wine I may buy with dinner is often much more expensive than buying wine from a store. It’s not uncommon to pay $12 a glass when an entire bottle of wine that is just as good costs half as much.

Unused gym memberships. I haven’t yet fallen into this trap, but I know many who have. For about a month, I was getting the exercise I needed by running every other day, but as the weather turned cold, I let this habit slip. Now I plan to go back to my previous state of activity, and I’ve considered joining a gym in addition. I haven’t pulled the trigger because I haven’t been able to convince myself that I would use the membership to its fullest extent. This is similar to my experience with Netflix; I joined the subscription service to receive movies by mail after a referral from a friend, but I didn’t have the time to watch movies or TV series as often as I thought I would.

Daily internet deals. CNN comes out on my side of the argument regarding social coupons and group coupons. There are some cases where the deals work out well. In fact, I used one with my girlfriend’s family this past weekend to see a movie that didn’t interest me. But the key to these deals is that you pay up front for the deal and claim the items — in this case, movie tickets — later. Many people never claim the items even though they’ve already paid for the deal. And, as I’ve mentioned before, sometimes the deals aren’t that great in the first place.

Bundled cable or phone services. The reason these waste money is because you often result in paying for a service you don’t need. It starts innocently with bundled old-fashioned phone service, where you would have to buy dozens of features you didn’t need just to get voice mail service or call-waiting; now, the communications companies want you to buy voice, television and cable services together in order to qualify for the best prices. With cell phones, chances are you’re paying for minutes you’ll never use, so it helps to downgrade your plan to one that fits your actual usage patterns. If you don’t need smartphone features and don’t talk much, pre-paid plans could end up saving you money, but many middle class households don’t consider them because they’re marketed towards lower income families.

CNN Money

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Review: Making the Most of Your Money Now by Jane Bryant Quinn

This article was written by Flexo in Reviews. 7 comments.

Author Jane Bryan Quinn took her massive personal finance book published in 1997 and revised and updated the information to create Making the Most of Your Money Now: The Classic Bestseller Completely Revised for the New Economy, which will be released on December 29, 2009. I got my hands on a copy of this 1,242 page book for a preview.

The strongest aspects of Making the Most of Your Money Now are its scope and its depth, from basic finances to insurance, home ownership, paying for education, and retirement. Quinn emphasizes that individuals form their beliefs about and relationships with money in early years of their lives, and can therefore be generalized based on what the experiences lived through as they matured and grew into a financially aware person. This allows her to contrast the Depression Kids, Inflation Kids (raised in the 1960s and 1970s), Bubble Kids, and Struggle Kids.

Making the Most of Your Money Now is best described as an encyclopedia with annotations. For example, Quinn explains the differences between four ways to own property with another person (joint ownership with the right of survivorship, tenancy in common, tenancy by the entirety, and community property) but goes further by building cases for and against joint ownership of property in any form depending on various situations.

The checklists included in chapter seven will come in handy. For every milestone one might encounter throughout life, Quinn offers a checklist to ensure the important considerations are covered. Each point on each list is described in detail. If you find yourself in the midst of a divorce, there is a (long) checklist for that. If you want to offer your kids allowances, there is a checklist for that. There is even a checklist for those of us starting a home-based business.

In one small section, the author takes on a topic with my admiration. As I, she is not particularly a fan of The Latte Factor — the idea that taking away a pleasurable but expensive daily habit will change your financial life. She agrees with me — the money you save by cutting out $3 or $4 a day can add up, but the real effect is caused by unnecessary spending, particularly on credit cards.

Quinn tackles investing, particularly those concepts that everyone needs to know. As someone who purchased company stock through an automated quarterly investment plan and is still hanging onto stock purchased at its peak waiting for it to return, I had an eye on the author’s thoughts on what it takes to break even, the four illusions I am cherishing:

1. You think that the price will come back soon because you couldn’t have been so wrong. In fact, the price could stay down for years. It might never come back. [ed. note: my company's stock needs a 100% return starting now to get back to its high.]

2. You think that as long as you don’t sell, you don’t have a loss. But a “paper” loss is just aas real as the other king. The stock is worth less than you paid for it. Period.

3. You think that there’s only one way of earning back the money you lost: by holding ion to the stock you lost it in. But you might earn your money back faster by selling the stock and reinvesting in something else.

4. You think that gains come just as easily as losses.

There are many more goodies in this book. But don’t buy it and expect to sit down and read it from cover to cover. If you want a book from which you can get specific ideas for action and read in one night, look for something like I Will Teach You to Be Rich by Ramit Sethi. Making the Most of Your Money Now is a book that is more valuable on your bookshelf, always available in an emergency when you need to understand a financial concept in detail.

Jane Bryant Quinn, the author of Making the Most of Your Money Now, is scheduled to appear on an upcoming episode of the Consumerism Commentary Podcast. We will be talking about some of the information found in this book. If you have any questions you’d like Quinn to answer, please leave them here and we’ll try to include them in the show.

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Put Your Savings in Hyperdrive, Part 4: The Expensive Coffee-Related Drink Factor

This article was written by Flexo in Saving. 22 comments.

I’m on a quest to determine a number of financial moves that will accelerate savings beyond the typical snail’s pace. I’ve written so far about opening a high-yield account, keeping your change creatively, and automatic your savings. These are all basic concepts that can be applied in interesting ways with a little bit of attention.

Many people disagreed with me when I railed against The Latte® Factor, David Bach’s trademark catchphrase and program which prescribes dropping your expensive morning coffee drink and depositing the value of each day’s savings into some sort of magical account that will return 10% annually after taxes and fees for forty years and end up with close to $1,000,000 more than you would have otherwise.

I’ll address my issues with David Bach’s program below. Nevertheless, a system similar to David Bach’s suggestion has merits for some people, thus I have a fourth tip for putting your savings in hyperdrive.

4. The Expensive Coffee-Related Drink Factor.

Obviously, I don’t want to call it The Latte® Factor, which is a registered trademark and a signature selling point that drives millions of dollars in books in seminars. Since I don’t drink coffee, I’ll use the therm ECRD to refer to any habit that requires a frequent expense but is easily controlled or replaced by another, less expensive habit. The savings from the elimination or switch can be accumulated and deposited into a high-yield savings account.

coffee

Problems With The ECRD Factor

It is important to remember that all of this is pointless if one doesn’t make smart decisions about the larger issues in life. You can forgo the daily coffee from Dunkin Donuts, but if you still eat two doughnuts every day, you’re spending money on something that you may pay for in health care costs later on. You can switch from premium gasoline to regular gasoline, but if you buy new cars every three years, the savings from the gasoline are ten or a hundred times lost by the unnecessary expense of buying new cars so frequently.

The scenario David Bach paints — an after-interest, after-fee, after-tax increase of almost $1,000,000 in 40 years from dropping your daily latte is an extremely unlikely scenario, both mathematically and behaviorally. Bach makes some serious assumptions that don’t have much validity in the “real world.”

You probably won’t earn 10% in an account for forty years after taxes and fees.
To invest in an account that earns even 8% over forty years, you will lose a lot of your money due to transaction fees. A $4 transaction fee, like the one charged by ShareBuilder, on a $150/month investment is a 2.7% fee right off the top. That’s not a wise investment.
Without your daily dose of caffeine, you may miss out on career opportunities while asleep at your desk. This sounds like a stretch, but if you quit cold turkey, you could see adverse effects in your productivity and you may miss an opportunity without knowing it.
It’s also quite possible that you enjoy your latte, understand the consequences and future savings you are giving up, and have decided your enjoyment is worth the potential loss.

So The ECRD Factor can have mixed results when you deal with variables in the real world. Don’t expect the kind of wonderful returns David Bach promises, but the frequent expense reduction or elimination that forms the basis of this tip can be a significant part of your saving strategy if the rest of your financial decisions are sound.

Making The ECRD Factor Work

What’s your ECRD? It’s probably best to pick something to which you do not have a physical addiction without appropriate support. While I would always suggest eliminating an addiction to heroin or alcohol, there are more immediate concerns in these cases than saving money, namely staying alive and healthy. It’s best to choose a daily expense that can be eliminated or replaced immediately without any significant withdrawal symptoms. The daily coffee-related drink might be a good candidate, particularly if you buy such drink from an expensive store like Starbucks. The good news is you won’t go through withdrawal if you simply replace the expensive drink with your own freshly brewed concoction.

And if you eliminate the drink entirely over the span of a few weeks, or replace it with water, you will get used to the change in chemicals in your brain within a few weeks.

Caffeine isn’t the only option. A coworker of mine has stopped buying lunch every day, opting to bring in a homemade sandwich instead. If not lunch, I know someone who used to eat out at an expensive steak restaurant every week. If you work in New York City, there’s the temptation to go out to the bar for happy hour with your coworkers. Do you smoke? Slowly cutting back will improve your health and save you thousands of dollars even before interest.

How about the news stand in the morning? If you pick up a newspaper on the way to the office to read on the train, consider this your ECRD. Replace the newspaper with a free news podcast if you already own an mp3 player. If you really like the newspaper, consider subscribing. You’ll save quite a bit off the newsstand price. The difference in price is your ECRD.

Apply Your Savings and Earn Positive Returns

If these are habits, cutting back (without affecting your networking experiences) and intentionally depositing the money you save will add up over the long term. It doesn’t have to be perfect. The three previous hyperdrive tips come in handy here. If you’re used to spending $4.50 in cash every morning for your latte and are ready to eliminate the drink entirely, put that $4.50 in your coin jar before you leave for work for later deposit into a high-yield savings account. Not a cash user? If you spend about $100 for your chosen ECRD a month, set up an automatic transfer from your checking to savings account for that amount. If your bank allows you to create separate goal-related accounts, like ING Direct’s subaccounts, create one specifically for your ECRD savings and transfer your monthly savings there.

Your high-yield savings account is not earning the 10% promised by David Bach. Forget about that rate and use the money saved for short-term goals. The more you save, the more you’ll also have available for long-term goals like retirement and legacy. So keep making good decisions all around — especially on the bigger expenses like real estate, vehicles, and education — and these seemingly small savings will add up over time. It starts off slowly, but compounding interest is the key to putting you savings in hyperdrive.

Image credit: Drab Makyo

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This Month in the Archives: Goals, Messy Desks, and Asset Allocation

by Flexo

If you’ve joined Consumerism Commentary within the past year, you might have missed out on what was published here previously. Here are a few articles from January in past years to catch up. From the First Half of January 2007 Do I Have to Declare Goals? 10 Things Your Gym Won’t Tell You Don’t Feel ... Continue reading this article…

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Best of Consumerism Commentary: January 2007

by Flexo

Here are a few selections from the first month of this year that I’d like mention. If you didn’t have a chance to read them the first time around, now is your chance. * Jan. 3: 10 Things Your Gym Won’t Tell You * Jan. 4: Beginning Employee Stock Purchase Plan * Jan. 4: Do ... Continue reading this article…

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The Carnival is Up!

by Flexo

Today’s Carnival of Personal Finance was hosted by Amanda at Young and Broke, There are lots of great articles to read, and so many it will take all week. Here are some highlights. * My Financial Awareness: Recognizing Resistances to Financial Planning * Frugal Law Student: I’ll Pass on the iPhone * Poorer Than You: ... Continue reading this article…

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