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.
Nick says
Just yesterday my boyfriend told me he wants to buy a tablet. I just told him to go ahead. He only has to do 3 weeks of backbreaking 12h shifts to finance it. Well, without eating and renting and he better walks and not use the bus.
Maybe first he could sell his old mobile phones and laptop to cover the first $10.
Nick says
Eating out
I usually take lunch to work. My mom gave me sandwiches when I had my first job, and now I changed to cooked food for the microwave in the office, as you can’t get decent bread around here.
Coffee.
A coffee maker is #12, a pound of coffee about #3. Lasts about a week if you drink coffee every day.
Books.
Our local library is closed when I am home and open when I’m in the office. But since I still have books I did not read, and now I also have acquired facebook, I don’t buy any more books.
Moving to England has forced us to use Pay as you go SIM cards as you don’t get a contract unless you have lived here for 3 years. So, we spend #5 a month each.
There are “cheap” broadband deals of less than #5 now, but this does not include the #30 line rental, which now seems too much for us.
So, no cable either.
Electricity.
We do not heat our bedrooms. Never. To get into a warm bed and easily fall to sleep, we heat it up with a 30W heating blanket.
Banking.
We do not use overdraft. WWe always pay credit card expenses in full, so no interest payments there either.
iTunes
Has limited our usage with: “We do not provide this service in your country.”
Online Purchases
Since the shops around here are closed when I come home from office, and the bus service to town is non-existent on Sundays, and we don’t have a car, online is a way to get things. It only requires to go to the post office on Saturday morning, that’s also the time when the library is still open. And the time when it is OK to make noise in home improvements. Start the washing machine, drill a hole to hang a picture (you don’t want to fall it down, so better do it right the first time).
Carol says
I always told my parents if they just took that $2-$10they spent on lottery tickets every week and stuffed it in a box (or smarter yet, a savings account), then in 5 years they could open the box and say “Hey Look! We won the lottery!”
Kent Julian says
Board games with family. Taking walks with family. Running. Listening to good music. Reading books. Enjoying a glass of wine or a good cup of coffee. Simple is so sweet.
june says
this post actually has me laughing…albeit painful laughter! just yesterday (before i read this post) my hubby and i were trying to figure out “where is all our money going??”, especially since he got a new contracting gig that’s paying him considerably more than the last gig.
when going through our last 30 days of transactions SEVEN of these eight items were painfully obvious in our register. (we don’t do the lottery…it’s the only reason eight didn’t show up!) we’re finding that when we’re paid better, we’re feeling more entitled to the little things that we did without when we had to pinch pennies. as of today, we’re going to live differently no matter the income level!
Donna Ramunno says
Many years ago I started simplifying my home….I was amazed and saddened at the same time by all the STUFF I had accumulated. All the $$$wasted..my mantra was if I hadn’t touched it in a year I wasn’t going to touch it again….and the boxes became full and donated in no time…well not really it took many months…so much stuff.i can honestly say I have never said “I should have kept that” it’s still a process I’m almost there! But I’m not where I used to be:-) I never buy my lunch…don’t drink coffee….so I save $$ there. This intense need to buy needs to stop! My journey continues…when in doubt throw it out……..
Kevin says
Thanks. Sharing this with our readers!
Kevin says
@Joshua, how do I change my avatar for comments on your site?
Kevin says
Never mind. :-) I see changing it at gravatar changed it here.
Michele O'Connor says
Lama, your suggestion about building up a “rainy day” fund is right on. Twice in my lifetime of 66 years, I found that the rainy day fund that my husband and I put aside saved us from financial ruin! If readers would like some other suggestions that are in line with yours, I invite them to go to “10 Simple Ways to Save in 2014” at http://www.ahhthesimplelife.com/10-simple-ways-save-2014/.
Heather says
Wow. Great article!
I just put a ton of books on hold for my kids and a handful for me from our library.
And…gasp! I went over my Amazon purchases… $2500 and some odd change since 2010. Ouch. I dont even want to look at Target’s purchase history. Needless to say…. I have now turned off the “one-click” purchase setting on my Amazon account. And even went so far as to just delete the credit card that I had on there. UGH!
What am I EVEN doing?!?
Christy says
Your comment made me laugh! I love it, I am in the same boat. Amazon is just too easy and time consuming!
I also love my local library:)
Pat says
Thank you for the reminder! All the little purchases really do add up. Especially thinking this as it is only Monday and I have spent all my daily cash and don’t get paid till Friday!