Where's It Going?

Photo by Chance Agrella

"Making money is like digging with a nail; loosing money is like pouring water on the sand." -Japanese Proverb

David Bach, a personal finance writer, in many of his books teaches people how to find money to save for retirement. One of his major contributions on the subject is something he calls the Latte Factor™. This is a concept where he challenges his audience to look at the money they mindlessly spend and find the place where they are thoughtlessly throwing money away. It is called a Latte Factor™, because he came up with it in the midst of the Starbucks craze where he noticed a large number of people getting gourmet coffee every weekday. If you stop to calculate how much your daily four-dollar latte costs you within a year, you could see how expensive a habit it is.

For instance, if you spend $4 a day on gourmet coffee on your way to work, in a week you’ve spent $20. If you work 48 weeks in a year (assuming two weeks of vacation and around 10 day for holidays) then you’ve spent $960 in a year on coffee. These estimates are actually conservative according to Bach. He factored in five to ten dollars a day. He doesn’t just pick on coffee drinkers, but challenges his audience to find the places where their budget is hemorrhaging. This can be lottery tickets, cigarettes, eating out, and the list can go on and on.

The point of this exercise is not to beat ourselves up about wasting money, its about seeing how the little things make big differences. He turns it around and tells the readers the wasted opportunity that these expenses cost. Bach gives a chart in Start Late: Finish Rich that shows that the same $20 a week invested in a retirement account can add up to some amazing numbers. If, for instance, I were to retire at age 60 (which is extremely early to me), that would mean that I would have 30 years until retirement, and with a $20 a week investment and nothing else, I could retire with $1.35 million.

There are two takeaways in this exercise: 1. The small, seemingly insignificant, things make a big difference, therefore sometimes a small change can have a huge effect, and 2. You have to think about how something will effect your future.

If the small things have an impact, just think about how much a larger expense would cost in the long run. Many people make less than favorable work/financial decisions because of what they thought were necessary expenses. The big one is almost always a car note. Many assume a car payment is a part of life just like a mortgage, and that simply doesn’t have to be the case.

Others wonder why they don’t have enough money to pay the bills and in their pocket or purse is an iPhone® or Blackberry®. How much would the $30 or more a month that pays for the data package do for a budget that seems to be just barely making its way through? Do we really need cable?

I’m not saying owning these things are wrong, but I do think each person needs to look at whether these things are helping or hindering us in life. Do these things inadvertently make our lives more difficult?

To me, it comes down to whether these things move me toward my goals or away from them.