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.
Mitzi Brammer says
Yep, Amazon gets me every time!
clemoni says
I agree that the Latte factor is not a good one! Especially because you will spend a good quality time with friends in a coffee shop, enjoying the time without being watching cable TV or shopping!
Overall, if you spend 15 dollars per week but spend a good hour each day, this is way worth it.
It is true that I do not agree with the people that go on drive-thru coffee lines! This is completely ridiculous! They should just do their own coffee at home at this point!
The other expenses make sense and is easy avoidable!
But the main thing that will reduce your expenses and give you more wealth is doing “free” or “near-free” activities:
– walking in a fair without spending much money
– walking in parks, pay soccer, hiking
– running (but no need to buy any expensive stupid shoes or gears!)
– playing cards (but not for money!)
– invite people over for coffee breaks or wine tasting
– share a movie with friends (even if you pay, if you divide the cost by 5 people, it is nothing)
Something I love to do with my wife:
– walk in residential area to look at houses! It is so nice and the talk is very interesting!
– When you visit cities, spend most of your time walking in the city!
– Participate in local associations (well I leave in France, and this costs absolutely nothing like doing theater, tennis, kayaking, etc… but even if this costs something in the US, I am sure you can find association for knitting, quilting, social events for nothing)
There are so many ways to spend less…
In the meantime, you can also reduce your spending by owning just one car and not 2! use the public transportation! Prefer having a small well located house/appartment than a big house baddly located. By location I mean, conveniency to post office, parks, grocery!
Avoid the stupid “bio”-centered marketed shops like whole foods! I am not going to make friends here but this store is plain ridiculous! Coming from France, the quality of foods is so much better even in hard discount stores in France than Whole food: when you spend there, you spend for being in a social class that wants to say: we are eating “healthy” and we contribute to the Health of the planet! Well you can easily do the same going to the market or even to decent grocery store, no need to pay for the overhead bio marketing markup!
People do not understand why French people are healthier! Well it is because they do those kind of activities and have more time to enjoy life! That , plus the burden of Health/Rent and Education costs that the US endure.
Try also to see if you can find a work in a niche that allows you to work from home! I have the best of the 2 worlds! I leave in France but remotely from Home. This is the best!
But spend money! to enjoy life! Just spend it for things that are worth it! Two nights ago, I went to a “night of tales”. I cost me 20 euros! Yes it is a lot in a way! But it was to spend time with people outside under a large tent with 50 people, to listen to stories that 8 professional storytalers were telling one at a time for the entire night!
It was relaxing, funny, experiencing communion, etc… I am not a hipster at all! Just telling that spending 20 euros for a night of story telling is worth it! Just spend when it counts! that is all!
I spend a lot of money on a cuckoo clock for example (about 600 euros for a cuckoo clock bought in Germany) but I hear it every single day and it made my day! I love the sound of it!
What you should avoid is more like spending money on the last iphone! that will last 2 years! unless it is a very important of your work life!
I will stop talking …. but to sum up, do spend money when it counts! but do not be cheap either! If it gives you pleasure in life, do spend it! Happier people will live longer!
clemoni says
Sorry for the typos! another way to avoid stressing and spend time that is not that worth it…. be spontaneous when you are writing :-)
Lynn Barton says
As the owner of a coffee house, I can not tell you how wrong financial advisers are at choosing a “latte” as the item to eliminate to build your bank account. Let’s look at the trillions of dollars wasted on alcohol, fast food, junk food, marijuana, cocaine, heroin, tobacco etc. All these items not only waste money they kill people!! A lot of people! And coffee is the one thing everyone should give up? Really? It’s even called the “latte factor”? Why not be the first to call for an end to all these things to not only save money, but save lives as well. Coffee is good for you. It’s full of antioxidants and it makes people happy. I’ve never heard of anyone dying from it and it brings people together in a positive way.
Lisa says
I. am. not. giving. up. my. coffee.
No matter how poor I am, that little ritual makes my day.
I think we also need to look at the psychology of the ‘little things’. what do they represent? What do we replace them with? (outdoor time and family time definitely). They are more than thoughtlessness, they are part of an entire lifestyle, and sometimes it takes time to work out how we want to tweak our lifestyle to achieve a balance.
Angelique says
May I add that just paying your bills on time saves money because those late fees can really stack up. Also, some companies offer a discount when you prepay for services, such as paying six months or a year for insurance instead of paying monthly.
Rebecca says
Restaurants and cafeterias provide great services which contribute to everyday quality. While it is always great to be aware of what one spends on, spending as little as possible as a general rule is not a great idea. A great idea is to be aware what you spend on and choose it by choice. It’s great to be able to enjoy small things like a capuccino.
I don’t spend on “stuff”, I’ve always been a minimalist. I don’t even have a TV because I don’t want one at home. I don’t even have internet at home. On the contrary I spend a lit on great services, ecological restaurants, great books etc… I think it’s REALLY GREAT if people spend lot of money on such things.
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Ava says
I have no cable, never eat out, spend $2 a week on a “splurge” for a once a week coffee. My books come from the library. I spent $10 on apps for my phone when I got it 3 years ago. I have not incurred a bank fee in years- in fact my debit card pays me when I use it as a credit card. Amazon prime saves me money- I use it only when the cost of a necessary item is lower than it is locally . I buy staples in bulk with it when it is cheaper than Costco- and they are delivered. I use the instant video part for my entertainment. I have never in my life purchased a lottery ticket. Our home phone is a VOIP service which costs $5 a month and I am thinking of cutting that out entirely.
I am still broke. Why? The cost of housing, utilities, fuel, food, services and tuition has escalated without control and my income has been stagnant for 20 years. At my age, a change of job or career is brutally unlikely. I am watching my financial security circle the drain and there is nothing left to cut.
Regina says
Very true in most cases. A friend keeps saying for example that she has it hard, no money. But knowing just what her income is makes it hard to believe she’s got issues. She doesn’t realize and just doesn’t want to hear that she spends a full month’s wage on her daughter’s weekly new clothes/new tablet or phone, 3 times a week eating fast food for 3 people but in general she hasn’t cooked in months herself just eating prepared food. A coffee out to drink is ok, but when you have multiple each day then it adds up quickly to be too much too. More people should be aware that a lot of spending is wasted money.
Nan says
Another place you can easily waste is Dollar Stores! It all adds up! Good for basics but watch those “isn’t this cute” items!