The Anti-Latte Factor: Have Your Savings and Eat a Muffin Too
David Bach, in his book, The Automatic Millionaire, wrote of The Latte FactorŽ. Bach noted that through saving $5 per day (by not buying expensive lattes) and investing it, people can achieve substantial savings. As I had mentioned earlier, in The Power of Compound Interest, over the course of thirty years, $100 invested at a growth rate of 10% per year will grow to $1,745.
The problem with The Latte Factor is that it produces lots of disutility and requires regular compliance. Spending $35 per week on lattes is a rather small luxury compared to many. If each latte takes a half hour to enjoy, by not buying lattes, you deny yourself of 3.5 hours of enjoyment each week. Also, not buying the lattes requires lots of impulse control, as you have to prevent yourself seven separate times from making a purchase.
While Bach advocates increasing savings by reducing your budget, I think that it is important for people to consider increasing savings by increasing one’s income. The average American works about 40 hours per week (2,000 hours per year), and makes about $40,000. Thus, the average American’s hour is worth about $20. Thus, to earn those lattes, the average American must work an hour and forty-five minutes.
I think that it would be far better for readers to try to increase their savings by keeping expenditures the same, and working two more hours each week. Why? It is far easier to dependably perform work than it is to dependably deny yourself a small luxury good. If the extra two hours of work are performed continuously (for instance, babysitting once a week), they only require one incident of weekly behavioral change. As the job quickly becomes part of one’s routine, no “willpower” is required to maintain the extra cash flow. From the moment the extra hours are added, the extra income should be directed towards savings and investments (or paying off debts). If this is not done, the person may factor the extra income into their budget, and simply consume more than in the past.
So, those who in the past have had trouble decreasing expenses might want to consider the logical alternative-increasing earnings. It probably requires a lot less discipline than giving up the daily latte.