Friday, April 3rd, 2009 at 9:43 pm
Please read the disclaimer before you continue.
What if I told you that one-cup of coffee a day could cost you your financial independence? Would you believe me? In the first part of this series we looked at the process called the rat race, and what it means to be broke. In his book: “The Automatic Millionaire”, David Bach talks about what he calls the “Latte Factor”. We will now look at what the latte factor is, what it means to you, and how you can benefit from the information.
Most people say that they cannot save any money. They say something like: “I live paycheque-to-paycheque. It’s hard enough to pay the bills, let alone save any money for retirement.” In his book, David illustrates the same problem. He had a woman at a seminar complaining that she couldn’t save. In an event to prove her wrong, David asked to go though her expenses with him in front of the class. By lunchtime she had already spent $11.20 on food andsnacks. Her items included: a double non-fat latte, non-fat muffin, juice, juice boost and a power bar. The phrase “latte factor” is a term for how much you spend a day on things you don’t really need to buy. Let’s look at the following example:
A Latte a Day Keeps Retirement Away
A Latte a Day $3.50
A Latte a Day for a Month $105.00
A Latte a Day for a Year $1, 260.00
A Latte a Day for a Decade $12, 600.00
Could you imagine spending ten grand on coffee? It is very easy to do. If you like to drink beer, take a look at the next example.
A Case of Beer a Week:
A Case of Beer $35.00
A Case of Beer a Week for a Month $140.00
A Case of Beer a Week for a Year $1, 820.00
A Case of Beer a Week for a Decade $18, 200.00
I know most people don’t buy a case of beer a week, especially if you have kids. However, take into consideration if you play any sports and go out for drinks after, or, if you go out with the ladies once a week to catch-up. These all will factor into this number.
Let’s look at the latte example supercharged. Let’s look at what it would look like to investthat money.
A Latte a Day Invested:
The average latte is $3.50 and we will invest it at 10%.
1 Year $1, 319.38
2 Years $2, 776.93
3 Years $4, 387.09
5 Years $8, 130.89
10 Years $21, 508.72
15 Years $43, 519.39
20 Years $79, 733.73
30 Years $237, 351.23
40 Years $664, 028.36
I want to give you a realistic example of one thing you could do to save more money. I want to help give you some ideas. How about instead of a latte, you make your own coffee. But instead of one cup, you will be able to have 2 cups a day. Let’s say the average home made cup of coffee is $0.25 a cup. 2 cups a day brings you to $0.50 a day, which is a savings of $3.00 a day based on our latte example. Now invest that $3.00 as shown below.
Make Your Own Coffe and Invest the Difference:
5 Years $6, 969.34
10 Years $18, 436.05
20 Years $68, 343.20
30 Years $203, 443.91
40 Years $569, 167.16
Just choosing to make your own coffee vs. buying a latte every day could help you save an extra half a million dollars! That means you could potentially retire 5 years earlier just by making one change.
The latte factor is a useful tool that illustrates how much it costs us to buy unnecessary things. You can see that buying coffee and snacks each day could end up costing you a lot more than you thought. There are small changes we can make though. Brewing your own coffee could potentially save you hundreds of thousands over the long run. The important thing is to take small steps in the direction you want to go.
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