What's in David Bach's Latte Factor?
This morning my wife was talking to me about the latte factor. I remember reading about it years ago in one of David Bach's books, The Automatic Millionaire. The concept is simple, you forgo a simple daily habit such as a little luxury that is not required and over time this money is invested and compounds into a substantial million dollar plus chunk of your retirement fund.
Some people have taken objection to this simple idea. It's been pointed out that
Bach's math isn't the best. He rounds up a few numbers like the cost of the coffee and also the total yearly amount saved, 2000$ versus the actual 1825$. He is rather generous with a 10% compounding rate taken from the historical performance of the stock market over certain decades. Inflation isn't taken into account, or taxes that could apply. Besides, who goes out and gets a latte 356 days a year for their entire working life?
Now lets be clear. The fundamental concept works. Pinching pennies and socking them away over years does add up. Many people have used this notion, some have pushed it very far and even managed to achieve spectacular results given enough time and dedication.
So what is the problem? Maybe the critics don't clearly grasp the latte factor is only an example being used to illustrate a concept. Bach is attempting to teach a few things like the power and effectiveness of savings and compound interest over time, and that little incremental things that add up to bigger chunks that matter.
Is it possible to drop the coffee and snacks on the days out of the house and replacing them with really good coffee brewed a home and taken along? How much does this kind of habit save over many years? Can that money be used to buy a very good coffee machine? Once that coffee machine is paid for has a new insight been gained into where money is going with a wider variety of little expenses?
The simple truth is each one of us has to think of where we are going with our spending. Yes a few pennies here and there might not seem to add up to much but it is as good a place as any to start. We've heard of so many people getting a lucky break like a huge lottery winning or starting a business with substantial financial backing only to see them a few years later with nothing left to show for it.
How can something like that happen over and over to so many people? Is the root of these spectacular failures nothing more than an inability to see that multiple small choices build up over time and accumulate into large masses of debt or savings depending which direction we nudge things day by day?
I suspect Bach's latte concept strikes a bit of a nerve. It certainly seems to connect with a host of bigger issues and beliefs we have about money. I'm going to have to get back to this and look deeper into the psychology hidden inside a seemingly innocuous debate about whether or not to spend money on coffee when out of the house.
Some people have taken objection to this simple idea. It's been pointed out that
Bach's math isn't the best. He rounds up a few numbers like the cost of the coffee and also the total yearly amount saved, 2000$ versus the actual 1825$. He is rather generous with a 10% compounding rate taken from the historical performance of the stock market over certain decades. Inflation isn't taken into account, or taxes that could apply. Besides, who goes out and gets a latte 356 days a year for their entire working life?
Now lets be clear. The fundamental concept works. Pinching pennies and socking them away over years does add up. Many people have used this notion, some have pushed it very far and even managed to achieve spectacular results given enough time and dedication.
So what is the problem? Maybe the critics don't clearly grasp the latte factor is only an example being used to illustrate a concept. Bach is attempting to teach a few things like the power and effectiveness of savings and compound interest over time, and that little incremental things that add up to bigger chunks that matter.
Is it possible to drop the coffee and snacks on the days out of the house and replacing them with really good coffee brewed a home and taken along? How much does this kind of habit save over many years? Can that money be used to buy a very good coffee machine? Once that coffee machine is paid for has a new insight been gained into where money is going with a wider variety of little expenses?
The simple truth is each one of us has to think of where we are going with our spending. Yes a few pennies here and there might not seem to add up to much but it is as good a place as any to start. We've heard of so many people getting a lucky break like a huge lottery winning or starting a business with substantial financial backing only to see them a few years later with nothing left to show for it.
How can something like that happen over and over to so many people? Is the root of these spectacular failures nothing more than an inability to see that multiple small choices build up over time and accumulate into large masses of debt or savings depending which direction we nudge things day by day?
I suspect Bach's latte concept strikes a bit of a nerve. It certainly seems to connect with a host of bigger issues and beliefs we have about money. I'm going to have to get back to this and look deeper into the psychology hidden inside a seemingly innocuous debate about whether or not to spend money on coffee when out of the house.
posted by Yvan Roy at 10:44 AM
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