I love it whenever I hear someone talk about David Bach’s now famous term “the latte factor”. For those that don’t know, the term refers to the idea that many people continually spend on small purchases (like a latte) that add up to a ridiculously large amount over their lifetime.
There are two reasons about it that intrigue me – it’s totally true and it’s totally misleading.
Why Latte Factor Makes Sense
The math is obvious. $3.50 everyday for a year is already over $1,200 dollars. You add the usual compound interests argument over your working career and it’s something like $1 million dollars (maybe a bit less but you get the idea) just on having a cup of coffee.
But the Latte Factor is Totally Misleading
That stat is certainly eye popping. So if I don’t go to Starbucks everyday and I don’t smoke either, I should be able to have $2 million by the time I retire. You may ask yourself that there’s just no way, so why won’t you retire rich?
Side note: a third reason I love the latte factor is that if David Bach is a latte kind of guy, there’s a good chance that he was sipping a hot latte from Starbucks while he wrote that book. I would never know obviously but could you imagine what the press would say about something like that?
The Real Reason You Aren’t a Millionaire
It’s like this. Most people are just happy with following other people’s advice without regards to the big picture. They think to themselves “Wow, I’m not drinking Starbucks anymore so I’m going to save $1 million bucks and that’s enough for me to retire on”. You know what happens to those people? They then buy a plasma TV.
Look. Saving $100 or saving $1 a hundred times is the same thing. Stop thinking that you are wasting money whenever you buy a cup of Starbucks because we all need to satisfy our inner splurge demons once in a while. Instead, here’s how I want you to think about the idea of becoming a millionaire.
The Easy Way to Be a Millionaire and Be Happy
The idea is actually really simple. All you have to do is set an amount of money that you want saved. It could be $100, $500 or even $5,000 as long as it’s based on your long term goals (ie it could be $1 million, it could be something else. Basically, how much you want to retire with). Once you hit that goal (or be able to project that you can easily hit it for the month), why not buy that latte or even an iPod if you really want to?
The real key to wealth is how much you can accumulate but it’s amazing how many people get hung up on how much they are spending. If you ever want to retire comfortably, start accumulating wealth by directly thinking about how much you are keeping, not necessarily about how many pennies you are spending.
- E*Trade IRA - Official Site