Start with One Small Spending Change for Big Financial Results
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If you could make just one small adjustment to your daily routine and completely change your ability to build wealth, would you do it?
We are so much closer to accomplishing our money goals that we think. The problem is that our habits and negative beliefs tend to get in the way. Use the Latte Factor to find the small changes to make to your daily routine and finally turn your big dreams into reality!
The Latte Factor is the idea that most of us have something that we spend small amounts of money on regularly, and that we would not be buying these things if we realized how wealthy we would be if that money were invested instead.
In other words, there is an opportunity cost to even the smallest of purchases. With every purchase that we make, we are making the decision not to use that money for something else, such as saving for retirement or paying down debt. The daily Starbucks stop is the most common example, hence the “latte” in the name. The Latte Factor shows us that a daily latte costs much more than the $5 price shown on the menu.
Now, nothing against lattes. It simply makes for a convenient example considering many people spend about $5 at a coffee shop every day. You could instead be investing that money and allowing it to build over time to fund your retirement. It might not seem like much to treat yourself with $5 each day, but when you consider that daily $5 adds up to $150 each month and could be invested over the next 35 years at a 10% average rate of return and grow into a $500,000 retirement fund, that daily coffee stop starts to sound more expensive.
You may feel as though you do not have any money to invest, not realizing how much you are spending on your daily habits.
Small changes are big wins.
There are people out there who want to focus on significantly increasing their income instead of looking at changing spending habits to reach financial goals. They call the Latte Factor “limiting” and “playing small.”
I’ve seen a lot of posts on social media (mainly from entrepreneurs and recruiting social sellers) saying something along the lines of “Leave me and my coffee alone. I deserve to treat myself because my business is so successful.”
Remit Sethi shares a similar message in his book I Will Teach You To Be Rich. This is a really great book and one that I highly recommend, but he’s overly critical of the Latte Factor, in my opinion. Remit urges readers to focus on the big wins – landing a big promotion, starting a profitable business, negotiating prices on your biggest purchases – so that you can ignore the small expenses and enjoy all the lattes that you want. While I don’t disagree with him about the power of big wins, I think he is ignoring an important fact: overcoming a small, wasteful spending habit is a really big win! While a $5 latte is small, a $5 every single day is HUGE. When you are just getting started growing your career and your income or just trying to make ends meet, $150 each month can be a lifechanging amount. If your daily latte habit is not bringing you the same amount of joy that having that extra money at the end of the month would bring, ditching that one small habit would be a major success.
It is important to note that I am NOT saying that you should stress over every $5 purchase or that you aren’t allowed to treat yourself once in a while. Quite the opposite, by simply changing a couple of habits that are costing you money without you even realizing it, you can establish a system that builds wealth for you and creates a rich life for you without you having to think about it.
The purpose of the Latte Factor exercise is to get you out of your head and out of your way so that you can make a real difference in your financial situation.
Many of us get stuck in the idea that there isn’t any money left at the end of the month for us to invest. Surprisingly, this often does not go away as our income increases, because our spending has a tendency to creep up as well. We need to take a look at our spending regardless of our level of income and make sure that our resources are being used to make the greatest impact.
It is up to each of us to determine what is important in our lives and what we want our goals to be. I know that what matters to me right now is having time with my family while my children are young. Rather than focusing on seriously increasing my income at this time, I would personally prefer to focus my limited resources on what really matters. Through a combination of cutting spending on things that do not matter to me and gradually increasing our income over time through multiple income streams, we are building a secure, rich life where we can freely spend on all of the things that are most important.
Regardless of how you feel about coffee, you can change your life with the Latte Factor.
Do not get hung up on the “latte.” Your daily coffee habit is not the determinant of your financial success. For you, this conversation might not have anything to do with coffee! If going to Starbucks each morning defines really living life for you and you are fully aware of what it costs you, that is just fine! And if you have never had a cup of coffee in your life, there are other ways for to save money.
The latte is simply an example of our tendency to spend small amounts of money over and over on things that do we do not care about, not realizing how those expenses seriously add up and take away from the money that we have available to spend on what really does matter.
Other seemingly small expenses that are seriously impacting your financial situation:
· Upgrading your vehicle because the monthly payment will be “only $50 more.”
· Paying for Amazon Prime so that you have random products sent to your house in two days instead of five days.
· A cable subscription or app subscriptions that do not benefit you.
· Subscription boxes.
· Buying instead of packing breakfasts and lunches and getting take-out dinners on a regular basis.
These are all recurring expenses that may seem small but could be seriously derailing your financial goals.
If you would invest just $50 each month, for 35 years, assuming a 10% average return, you will add $170,000 to your retirement savings. For many of us, that is two years of income! Is your vehicle upgrade or FabFitFun box worth that much to you?
The point is that there is power in paying attention to what you are spending your money on.
We are not talking about making serious sacrifices or not thoroughly living your life. We are talking about putting your resources to better use to ensure that you are living your richest life! Cut out a few expenses that don’t really matter to fill your life with the things that do.
In my absolute favorite personal finance book, Automatic Millionaire, David Bach says, “If we thought about it and changed our habits just a little, we could change our destiny.” Your financial success is worth taking a look at what small changes you can make.
Find your factor!
First, review your last few credit card and bank statements and check your app subscriptions on your phone to find recurring expenses that you do not need (or maybe haven’t even noticed before!). The changes that take the least work up front and automatically save you money month after month are the best!
Then, write down every single item that you buy. After a few days, take a look at where your money has gone. Are there any surprises? Any regrets? Think of changes that you can make to reduce or eliminate those expenses going forward. Focus on the daily habits and not on your willpower (things like “switch to a less expensive makeup brand” vs “spend less at the grocery store”). You want to make one easy change, not stress over every dollar you spend.
Choose one small habit to change, estimate how much it will save you each month, and set up an automatic transfer of that amount to your credit card, savings, or investment account to swap wasteful spending with building wealth. Rinse and repeat.
I would love to see The Latte Factor from your perspective!
What is one small habit that you can change for less wasteful spending and more of what matters?
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Also, you need to get your hands on a copy of The Automatic Millionaire by David Bach! It is the most simple, straightforward, easy-to-implement financial advice I have ever read. His set-it-and-forget-it system allows you to build wealth without obsessing over your spending. Click here to order your copy!
