Why You Should Buy That Morning Latte

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Pretty woman wearing red sipping a cafe mocha
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By Jim Wang

The Latte Factor was an idea popularized by David Bach in his book "The Automatic Millionaire." The basic premise behind the Latte Factor is that you make small expenditures each day that, over the course of the year, add up to a significant sum.

Bach's core example is that of a morning latte. You wake up, visit your local Starbucks (SBUX) and plop down a few bucks for a cup of coffee. Over a year, $3 a day turns into more than $1,000 in coffee.

These small expenses pile up, and had you consciously made a choice, you probably would've preferred to save that money rather than spend it on coffee.

On the face of it, it sounds like a powerful idea: Find the different ways you are spending money, and start cutting them one by one. Cancel your cable. Brown bag your lunch. Brew your morning coffee. Over the course of a year, you'll save thousands!

While true, it's unrealistic and inefficient.

To take the coffee example, you could buy yourself a coffeemaker, coffee grounds and filters, brew your own coffee and save yourself a few dollars each day. But you'd also have to alter your morning routine to include brewing coffee, and you'd likely not brew a comparable product to a Starbucks cappuccino.

All that to save a dollar a day? That's crazy.

You feel effective because you're doing something to save money, but the actual benefit is quite minor given all the extra work. It's also unlikely that you'll stick with these big changes, especially if it disrupts your normal routine.

What should you be doing instead?

Focus on a) cutting costs that you make unknowingly but could cut without noticing and b) negotiating down as many big expenses as possible.

a) Cutting costs: Start by listing all your expenses and decide which fall into one of the two groups. We all have expenses we pay because we forget: that gym membership we never use, the Netflix (NFLX) DVDs we have piled up on our coffee table -- the list is endless. You need to cut those out immediately.

If you absolutely love your morning coffee, keep buying it. Saving $3 will seem like a pittance when it costs you your sanity. If you don't need the caffeine to start the day, then save yourself the few bucks and put them toward something that matters.

It's about being intentional with your spending. Save in the areas you don't care about so you can spend in the areas you do care about.

b) Negotiate: As for the big expenses to cut down on, you should look for a handful of big wins rather than a million small ones you won't even notice. An easy cost-cutting measure: Take 15 minutes and call up your cable company to negotiate a lower rate. The basic strategy is simple -- threaten to cancel, and wait for their counter offer.

Repeat for any service you pay a monthly or annual fee. The beauty of this strategy is that you can lock in huge savings for an entire year by spending 15 minutes on the phone.

If negotiation makes you uncomfortable, consider this -- everyone else does it. The consumers who don't threaten to cancel and negotiate a lower price are paying more than they should and end up subsidizing other people's costs.

Cutting expenses can only get you so far. In the short term, eliminating expenses is effective and empowering. But in the long term, there's a limited upside to cutting costs, and eventually there won't be anything else to cut.

To truly find financial freedom in the modern age, you need to do more than reduce your spending. You need to increase your income. That could be in the form of investments, such as the stock market or real estate fueled with your savings, or entrepreneurship or being strategic in your career moves.

Unlike cutting costs, growing your income has an unlimited upside.

Jim Wang is an entrepreneur, who founded microblogger.com. For actionable advice on how to build your own business, join his free newsletter.


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7 Comments

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ggalonso

This is such sketchy advise, 3 dollars a day is a lot of money, and it only takes 10 minutes or less to make your own coffee, and I make really good coffee, better then Starbucks I've been told. By leaving out these nickel and dime expenditures, it builts a habit of thrift. If you are accustomed to weighing the cost of petty things, why wouldn't you also be cautious with the big ticket items? Like keeping your car until it dies, instead of having a perpetual car payment. By buying a house you can afford, by not competing with others to have the most current, shiny thing. Thrift is a habit. To advise people to blow their money on frivolity and then say buy stocks that's better is advising people to risk money they may not have to gamble on doing well in the stock market, and then to say the best way to save money is to get a bigger salary, OMG! no kidding? But how many people can actually do this? With the majority of the jobs created during the recovery being minimum wage jobs and with the increase in contract work and part time, it is getting harder and harder for everyday people to get a better paying job. Sure, some can and do get better paying jobs but only some.

January 15 2014 at 4:18 PM Report abuse +4 rate up rate down Reply
drpmindmender

Hey Daily Finance...

...How much did Starbucks PAY you to promotte their business while offering this lousy advice, advocating laziness combinde with tips on how to be a spendthrift?

January 15 2014 at 4:07 PM Report abuse +2 rate up rate down Reply
betty_brock

Make your own coffee. You don't need the fancy stuff.

January 15 2014 at 1:03 PM Report abuse +5 rate up rate down Reply
suealiaim

57 cents vs. $3.00 or more.
saves more than a dollar a day.

January 15 2014 at 11:57 AM Report abuse +5 rate up rate down Reply
nevadan99

Buy that morning latte. You keep Starbucks in business. Any one that is willing to pay $5+ for a cup of I don't know what, deserves to get ripped off.

January 15 2014 at 11:34 AM Report abuse +6 rate up rate down Reply
lynnehelm12

This theory doesn't hold water. Brewing your own coffee saves far more than a dollar a day. Lots of little cuts do indeed add up to big savings.

January 15 2014 at 9:52 AM Report abuse +8 rate up rate down Reply
Valerie

Looking for huge expenses to cut out in your budget is not realistic. In this current economy, most of us have already cut those out.

His suggestion of negotiating on the price of cable TV is hard to understand, in view of the many alternatives to paying for cable TV service. (Why continue to pay for a "service" which increasingly fits the description of: "There is nothing good on TV to watch".)

Also, the basic premise of this article is that we should continue buying lattes, dining out, paying for cable service, and all the other stuff we have been mindlessly spending on for years.

This writer thinks it is a waste of time to eliminate little repeated daily expenses. However, reality is that all those little expenses can easily sink your financial boat.

Financial success is NOT about finding ways to continue spending (as this writer wants you to believe). It's about learning how to save money and how to keep more of that money you work so hard to earn --- not about thinking spending can buy happiness.

January 15 2014 at 9:17 AM Report abuse +6 rate up rate down Reply
1 reply to Valerie's comment
betty_brock

Is the author a Congressman? He thinks like one.

January 15 2014 at 1:05 PM Report abuse +3 rate up rate down Reply
alfredschrader

The Dunkin Doughnuts latte is better than the Starbucks latte.
I've brewed coffee for astronauts, celebs, and generals.
There is little difference between using the grounds and premium coffee crystals. If anything the crystals don't leave any grounds floating around in the final product.
A secret: Taste your water first. What ? Mineral content can vary depending on the water source.
If your water lacks minerals add a pinch of salt, then try your coffee again. If it's better, add a dash of salt each time to your brew.

January 15 2014 at 7:47 AM Report abuse +1 rate up rate down Reply