Editor’s Note: This is a guest post from Lama Farran, a Certified Money Coach at MaxWorth.
Maybe the biggest misconception about building wealth is that it is a function of our income. In reality, it is much more a function of our spending habits.
But most people are simply unaware of how much money they spend—not so much in the large purchases, but in the small things we spend money on every day.
David Bach, a financial author, assigns a memorable phrase to this phenomenon. He describes the small amounts we spend here and there as the Latte Factor®. It comes from the notion that if we added up the cost of our daily lattes and saved it or invested it, we could build up wealth significantly faster.
As a certified money coach, I encourage my clients to build up a “rainy day” fund for events they could not have planned for: a car accident, a water leak, or even a sudden job loss. The most common objection I hear is, “Where will I find the money to save for this emergency fund?”
I always introduce them to the Latte Factor®. I challenge them to track every expenditure for one month. I can almost guarantee that those who complete the challenge will be surprised to discover where their money has been disappearing to.
I have used this tracking experiment with hundreds of people from all different socio-economic backgrounds.
Here are the 8 most common money leaks I have witnessed:
1. Eating out. Americans go out for lunch on average twice a week and eat 18.2 meals per month outside the home—this averages to spending $232 each month eating meals prepared outside the home. At first glance, this may sound high—surely we don’t spend as much as the average.
But we tend to disregard how quickly it adds up: quick lunches at the office cafeteria, business lunches with associates, little snacks from the vending machine, a bag of chips before we hop on the train, pizza takeout on the way home, a weekend date, or a night out with friends. We never make all these purchases in the same day, but over the course of 30 days, they definitely begin to add up.
2. Coffee. There is no question that coffee plays an important role in workplaces across the United States—even the Latte Factor® draws its name from the beverage. But rarely do we realize how much money we actually spend on it. The average American spends almost $15 a week on coffee or $1,100 annually.
This may seem like a significant amount of money to some or not much to others. But either way, it is money that could be directed toward paying down credit card debt, a student loan, or a burdensome car payment.
3. Books and magazines. Reading is important. I encourage people to do more of it. But if you are a prolific (or even regular) reader, you may not realize how much of your money is being spent on books and magazines. Book purchases are often small in nature, but if consistent, they add up. Frequently, readers who complete this tracking exercise are surprised how much of their income is spent there.
We are fortunate to live in a country where almost all communities have their own public libraries. Why not use them as much as possible? Another solution is to find a group of friends or family who regularly exchange and borrow books with one another.
4. Unused utility services. Paying our utility bills blindly often leads to overpaying for services. Are you watching all the cable channels you are currently paying for? When was the last time you used the 3-way calling or the call-forwarding options on your home phone? Taking a few minutes to review your bills and asking yourself if you really need these services could save you money every single month.
Call your service provider and ask what specials they currently have or what they can do to help decrease your bill. You may be pleasantly surprised how much a 10-minute phone call will save you.
5. Extra banking fees. When we don’t take the time to review our monthly bank statements, we often fall into the trap of blindly paying banking fees we could easily avoid—especially if you swipe your debit card more than your plan covers. Overdraft fees are another way your bank account gets hit or withdrawing cash from an ATM that is not associated with your bank.
You can quickly rack up $20 or more of additional fees each month if your banking plan is not the right fit, or if you consistently avoid walking one more block to withdraw money from your own bank’s ATM. Take the time to review your bank statement each month looking for inconsistencies. When you do, make a special note of Bank Charge line items.
6. iTunes. These days, most of us own a smartphone where our credit card is automatically linked to an online store. As might be expected, this arrangement makes it easy for us to press the “Buy it Now” button. One day, it’s a cool ringtone that “you really really want”; the next day, it’s a newly released single from your favorite artist; the day after, it’s a new app that seems so useful or entertaining.
And the cost is not just financial. While smartphone users spend $25 billion on mobile apps, we also spend over 2 hours every day using them.
7. Lottery tickets. When we are struggling financially, buying a lottery ticket becomes our glimpse of hope. For a few moments, when we are checking the numbers, we feel as if our life worries will suddenly vanish and our dream of living a debt-free life will finally come true. Through this small ticket, we see the light at the end of the tunnel.
But the truth is, it is simply an illusion. Hopes of a better life cannot be bought with $2 or $5. It’s something you consciously work towards, every day.
8. Amazon purchases. I spoke recently with a friend who ran his Amazon account history and was shocked to discover he had spent $11,000 over the past 4 years on Amazon. He noted that his history included one large purchase over $1,000 (a new laptop) and a few more items over $500. But the vast majority of his total bill had been spent purchasing items in the $10-$20 range.
These online purchases seemed small and insignificant individually. But over time, these impulse buys added up to a very significant number—the very definition of the Latter Factor®.
Some of the areas above are certainly more relevant to you than others. They merely represent the 8 most common money leaks I have witnessed.
The most effective way to discover our specific Latte Factor® is to track your spending. Try for 1 month, but 3 months is even better. It will then be much easier to pinpoint your weak areas and adjust your spending accordingly.
Paying attention to the small money leaks, while they are still leaks, will prevent them from becoming floods. More importantly, it will allow you to build your safety cushion to fall on when life happens.
***
Lama Farran is a passionate Certified Money Coach, living a debt-free life in Montreal-Canada. She is on a mission to increase people’s financial awareness. She helps families take control of their finances and budgets, without selling any financial products. You can find out more at MaxWorth.
We saved a ton on fancy coffees over the past few years by investing in an espresso machine and favorite flavors. I know, that involves a purchase, but it’s a fixture in our home that saves us about $300 a month, considering our coffee habit.
This is one of my all time favorite books! I recommend it to all my clients.
A few years back a friend put me onto YNAB (You Need A Budget). You’re totally in control of it, but it excels at showing you the Latte Factor®. When you see that the $15 you put into your coffee category means your savings goal misses out, it begins to hit home.
I went from living paycheck to paycheck, to buying some rather nice hi-fi equipment, guilt-free! When you’ve allocated your money, you’re not worrying about running short in one of the essential areas, and targeted discretionary spending is more fulfilling. It becomes an exercise in patience and mindfulness.
Haha… and the chocolate factor is always my splurge! Back when I was studying it was cheaper to eat a chocolate bar over 2 days then actual food… even now, chocolate is a hidden cost that adds up and I have learned to bake something with it in to make it last longer.
I never buy coffee out. I buy lunch probably once a month and usually regret it.
I get frustrated seeing the “latte factor” brought up repeatedly when my student debt could’ve purchased me 133 lattes a month for nearly 10 years. I cook at home, make coffee at home, help family out, and boycott Amazon. Sure the little things can add up, but so do the big things like rent, groceries, utilities, and having a reliable car!
Thanks for the comment. You are right, the big things do add up. Which makes managing the small things even more important in my book.
Yes.
I’m sure tracking my spending would be a good idea. But really, truly, the only thing in that list that I spend on is banking fees, and usually it’s late fees. If I spend on lunch it’s in the grocery store buying normal grocery food that I had at home but just didn’t pack (nuts and a banana for example), nothing special or extra. In this area, I’m ready for the advanced class. But I always only hear entry level examples.
I take the joy in longing for this latte. I can’t buy into it as always. The savings is always worthwhile. Love learning from your side how to put aside each penny and loving it. Invest in all I can and at the same time and being able to give to myself the time and space to get more tasks done. Greatly appreciated. I will be looking for more of your posts.
Great post, thanks, Joshua.
I worked from home for 10 weeks this spring, and I estimate that I saved close to $800. $40 x 10 weeks for gas=$400, and $40 x 10 weeks on lunches and/or dinners out=$400.
Based on comments I’ve read online, I would have to add “wandering the aisles at Target because you’re bored” and buying the kids a trinket. Your kids don’t need a toy every time you walk into a store. Have your child/ren take a small stuffed animal from home and have them “keep an eye on them”. Tell them you’re relying on them to make sure their “friend” doesn’t get lost in the store, etc. Most of the time, the child will be so busy introducing the “friend” to the store, they will totally forget about the “gimmies”. If you’re worried about them dropping/losing it, tie a “leash” (ribbon) around the animal and the child’s wrist.
Great idea!
I agree. The big box stores, particularly Target, has set up their stores in order to capture you with unnecessary items so you will spend exactly an amount of money you are OK with. This lunch hour, I ran into a big box store for the first time in three months to purchase several necessities (toothpaste, shaving cream) that I had not needed since early spring, and I still slipped in a bag of candy for my staff, adding $10 to my bill and more plastic into the environment.
$15 a week on coffee = $780 a year, not $1100…
Correct. The $1100 would be about $3/day over a year; not the $3/day over a 5-day work week.
First, I thank the author of this article, as well as from Ms. Christina who introduced this to me.
The Latte Factor strategy is great for new immigrants who can not find suitable work and for teenagers who want their money to savings is much more informative. But on the other hand, if all they want to do these things they may coffee shops, book publishers or food industry will go bankrupt and become unemployed labor and community problems increases. Finally, government tax increases, they will have the money saved will be given to the government.
It’s a good article! I appreciate it. It’s good to take care at all of this bearings when you spend your money. This days we have a lot of temptations and we buy stuffs that we don’t really need. In the same time, is good to take care about how you use the credit card, the extra banking fees, unused utility services.
Inés
Very interesting tips. Sometimes
unconciously, we have small spending habits that leaks money from us.
Good time to change this.
In my iranian culture i used to save my money just in case and i don’t spending spree when i go to shopping, so i totally agree with the writer.
According to statistic two groups of people investing money in united state, Iranian and Mexican .
Hmm ok in my German, English, Irish culture though have not been to any we save when possible.
Welcome give us more advice on how to control spending. Then I can use the money is saved by the method they give to invest. Before I buy stock use my salary. While now as a new immigrate without job, I do not think I can still do it. And this article let I see maybe I still can do it.
Thank you. It is a very good question ” how Doug you spend your money”. Some people do not care, and some of them go for shopping for fun and get a good feeling. Some researches show that they get more satisfaction than saving money.
Me as an immigrant, try to spend my money, actually my saving, very carefully. I take my coffee with me from home, I don’t eat junk foods and I go to gym for workout 4 times a week.
Spending money for being healthy is needed, and if you do not care about your health, you need to spend a lot of money for it as well.
I believe that it’s a good idea to be aware of you money spendings.
I always enjoy reading books, and I spent a lot of money for buying books per month . Now, I decided to change my bad way to borrow books from public libraries.
I agree.
Just don’t make you life so miserable like Uncle Scrooge. Being thrifty not stingy. You save a week on coffee/latte to go then allow yourself a coffee morning at weekend with your pals.
Yes, being stingy is no fun, quality of life is important.
I totally agree with this statement. And I try to use it.
Totally agaree. Most people spends money on every little tiny things and they doesn’t feel it.
I agree!
Love
Thanks !
Eating out & enjoying a coffee should be enjoyable, social experiences that bring richness to life & support local business. Wasting money happens when we don’t plan–hastily grabbing take out or ordering pizza because you don’t have any food at home, or driving through for coffee because you didn’t make any.
I always keep staples in my freezer in case I don’t have leftovers for lunch-like frozen peas & veggie burgers-just throw in Tupperware & take to work. I bring inexpensive things like coconut milk to liven up the terrible office coffee. Make extra coffe at home in the morning & ice it in the afternoon.
Then spend your hard earned money on a nice meal or drink with a friend!
After 40 years of marriage and motherhood, I am sick of cooking. We eat out more….never order drinks…just drink water. As far as amazon, I only buy what I need from vitamens and tissues to shoes and underwear, and it saves me time and driving from store to store to find the right product. Great sales can be found on line. So, my amazon credit card is large, but not my other card (which both are always paid fully on time), and amazon prime gives me a percentage for next purchase. Also, great if I want to buy something needed for those I love, and it is shipped right to them across the country. Just use discipline. If you don’t need it, don’t look.