The “latte factor” – the notion that if you don’t spend five bucks on coffee every workday you’ll have a million dollars 40 years from now – has gotten on my nerves since the moment I first heard it.
The basic idea is kinda-sorta accurate: If you spend $5 here and $5 there without paying attention, that’s a whole lotta opportunity cost. Think of what that whatever-it-is-per-week could do for you elsewhere.
So yes, that’s factual. But it’s also fictitious, as personal finance writer Jean Chatzky pointed out in a taut, blistering article called “Newsflash: The f***ing latte is a f***ing metaphor.”
“(Coffee) is just an example of something you don’t have to buy, but that you choose to buy. It’s a discretionary purchase that you make with your discretionary income,” Chatzky wrote.
“The real point here – the one I tell parents is the most important financial lesson to instill in their kids – is that money is a limited resource. And we all have to choose how we want to use it.” [emphasis added]
Hear, hear, Ms. Chatzky, and may I buy you a Grande misto an inch of 2% milk and two Sweet’n Lows at the Financial Blogger Conference next month?
According to the article, that’s her coffee of choice. She buys it fairly regularly and enjoys every last caffeinated sip. Because she’s budgeted for it.
Yes, I believe that too many of us stop paying attention to our money – until we have less of it, at which point we wonder what happened. But in my opinion (and apparently in Chatzky’s), the latte factor is a myth. Not just because the math is fuzzy (see her article for why), but also because it’s a distraction from the real issues:
We’re not earning enough, and
We’re not saving enough.
If you don’t make much money it can be hard to manage your bills (especially if you have high student loan payments). If you can barely manage the basics you can’t save much, or anything at all.
And if you’re just about managing right now, you’re not getting ahead. In fact, you’re sliding backwards. Without savings, you’re losing on two fronts:
The short term, because the next thing to go sideways has to be fixed with a credit card (or, heaven forfend, a payday loan).
The long term, because saving for retirement is crucial in this era of vanishing pensions and jobs that don’t offer 401(k) or other forms of retirement plans.
Needs vs. wants
That’s why I invited readers to take the No-Spend February Challenge and the Saved Savings Challenge: to learn to start seeing where our dollars go. Some who considered themselves frugal, or at least mindful, were surprised how things like breakfast out after church or visits to the dollar store had become automatic.
Even if they had breakfast makings at home. Even if they didn’t need anything specific yet came out with a bag full of buck-apiece treats.
You might be thinking, “Well, that’s their latte factor.” And you’d be kinda-sorta right, in that they were spending for something they liked but didn’t strictly need.
It isn’t the spending that’s troubling, though. It’s the lack of awareness. Full disclosure: When I visit my daughter in Phoenix, I always hit the Dollar Tree and come out with things that I need (dish towels, lotion) or things that I want (gingersnaps, some surprisingly good hardback fiction).
But I’ve budgeted for this. I’m choosing to spend. More to the point, I don’t grab stuff at random because it’s only a dollar.
I don’t advocate taking away small (or large) things from your life if they give you joy. What I do advocate is taking care of business first: Pay your bills, save for retirement, plan ahead for things that might happen (car trouble) and that will happen (the holidays, which seem to catch so many people by surprise).
My frugal mantra has long been, “I save where I can so I can spend where I want.” Perhaps I should be more specific: “I save where I can, meet my obligations and then spend where I want.”
The latte factor and choice
How to get control of your cash? Chatzky suggests – as do I – tracking your spending for a month or so.
Carry a notebook or use the notes app of your phone, but make sure you track every. single. dime. You might be surprised, or a little terrified, at how money slips through the cracks for a magazine, a package of beef jerky, a lipstick, a bottle of Powerade, a lottery ticket.
“It will open your eyes to where your money is going in a way that nothing else ever will. Then use that information to decide what you want to spend your money on, what’s worth it to you, and what isn’t,” Chatzky says.
It’s all about choices. Make smarter ones about your money, no matter how much of it you have. Warren Buffet still lives in the same house he paid $31,500 for back in 1958.
That doesn’t mean you can never have nice things. It just means choosing which things are worth it – and making those choices after you’ve taken care of business.
(For those who are having trouble setting money aside, please read this free Google Doc, “Challenge Yourself to Save.” It contains more than 30 examples of “stealth savings” hacks that will help you find a few (or more than a few) dollars even in a super-tight budget. This is a chapter from my first book, “Your Playbook For Tough Times: Living Large On Small Change For The Short Term Or The Long Haul.” Feel free to share the link.)
As I reach the last days of my planned work life I’ve become very aware I’ll be living on less. I’ve got an upcoming vacation which will be very expensive. Keeping track of daily expenses is a great idea. However some of the poorest people I know have a pricy Starbucks drink in hand at all times and the latest iPhone. It does come down to managing a limited resource.
I was a spendthrift of the first order and I married an extremely thrifty man. After a few years of him flinching at how our debt had grown, largely due to my habits and desires, he finally decided he had to impress on me how much we were wasting. It has been our habit since our marriage to spend our anniversary over a nice meal, discussing what we liked and what we didn’t about how our marriage was going. That year he told me our spending was giving him an ulcer and asked me to agree that for one year we would record every penny we spent every day. That was all he asked, not that I change my spending but that I agreed to look at it. He designed a program and for the next year I kept to the bargain: before bed every night we made sure we recorded, literally, every penny we spent that day. At the next anniversary, he brought to our meal a chart of the spending in every category. I felt like the old story of St. Paul (before he was a saint) being struck by the light on the road. I was horrified and, frankly, ashamed, at how out of control my spending was ($3,200 on books and magazines in one year? Really?) and how despite a large combined income we had managed to amass a pretty large debt. That night we agreed to our spending goals for the long future and then for the next ten years. Then we broke it down to a yearly set of goals. That was 29 years ago and we still record every penny we spend, every single day. We don’t have a budget per se, but by being so mindful we don’t really need to. All of which is to say, your suggestion of tracking every penny can change your financial life.
The no-spend challenge in particular was an eye-opener for many. I’ve decided to continue the saved savings challenge until my trip to London, which will probably take place in spring 2021. About to transfer $147 for the month of July — it does, indeed, add up.
Thanks for sharing your story. It, too, was an eye-opener.
That’s some serious adulting going on in that marriage. Bravo!
So very true. I shop at thrift stores and have to often remind myself, even though something is only a few dollars – if I don’t NEED it, it’s not worth spending on. Those few dollars will serve me better in retirement 🙂
I also have continued the “saved savings” – no particular goal in mind, just for funsies 🙂
Yes, it’s a metaphor for think before you spend and always has been. But still I’m glad someone is laying off my Starbucks for once:) I limit myself to one a week and yes, I’ve added up what that comes to in a year. It makes me happy so it’s in my budget. I’ll save that $5 a week somewhere else.
Budget for the fun stuff as well as the necessary stuff.