The Latte Factor is a thing. A guy even wrote a book about it, arguing that saving your money on the small things (like latte’s) will add up over time and result in a rich life.
Maybe you’ve felt the sting of guilt about spending money on those little luxuries that seem to make life worthwhile.
The drink after work with friends; the daily run to the coffee house that serves those excellent oat cakes; extra-cushy toilet paper; fresh cut flowers; a long, hot shower.
Whatever it is that floats your boat.
A lot of financial advice focuses on encouraging us to give up these little luxuries in our lives. Because after all, little expenses add up over time. Every penny you’re spending isn’t doing that magical, wealth-generating thing called compounding.
A couple years back, an Australian billionaire caught a bunch of flack for saying the reason Millennials aren’t able to buy houses is because they are frittering their money away on avocado and toast. And lattes.
(The memes that sprouted from that were priceless)
Since then, I’ve noticed a kind of meta-debate amongst the personal finance literati.
On the one side you’ve got billionaires shaming people for being spendthrifts with their latte’s and avocado toast.
On the other, people like Helaine Olen argue that the average American is screwed because the cost of housing and healthcare are so high that dropping your daily latte habit isn’t going to make a bit of difference in your financial prospects.
As with most things, there’s a grain of truth in both perspectives.
But the good news is that your daily latte habit — or whatever your thing- won’t kill you, or your finances.
Frugal is as Frugal Does
Conventional wisdom holds that you’ve got cut out every “frivolous” expense in your life to get ahead.
You should squeeze out every drop of material joy from your life and stash away the savings for some future emergency, and/or invest it in an index fund. They say. (Oh, just shoot me now.)
Look, I won’t knock frugality too hard. Mr. Money Mustache makes a compelling case for it on his blog, which is geared towards people wanting to live the good life on peanuts and retire extremely early.
His blog contains a ton of financial wisdom and great ideas for saving money, though I suspect his hard-core frugality won’t appeal to everyone.
However, his methods are sound, and coincide with a key concept that I am focusing on here:
The problem is not our savings rate, but our spending rate.
Our spending rate is the quantified measurement of how well we live within our means. In other words, how much do we spend relative to how much we earn?
We’re endlessly advised by personal finance experts to save a certain percentage — say 10–15%-of our income, invest it wisely, and we’ll be set.
True enough, but the problem here is that the focus is on something that we can’t exactly choose. We can’t choose to save 10 percent of our income if there’s nothing left over at the end of the month after paying the bills and living life.
Where our power — our ability to choose — comes in, is in what we choose to spend, and what we can earn. We can exercise agency in both these areas.
Buuuut….you might say: how many latte’s and avocado toast and fair-trade chocolates will I have to give up? How much scratchy toilet paper, and dishes that don’t match, and free days at the museum will I have to endure in order to scrape together 10 percent of my income?!!
Yesss! My point exactly!
My life would not be worth living if I had to give up movie popcorn, or Pirate Stout, or baked salmon.
Have Your Latte and Drink it Too
By focusing on your spending rate rather than savings rate, you open up the possibility of a wider range of choices in structuring your finances. Which enables you to both enjoy your life and save more.
Spending rate is a function of both spending and earning. By making smart choices on both sides of this equation, you can really start to move the needle on your ability to save and grow wealth.
To some extent you can affect how much you earn. And you have a significant amount of choice over what you spend money on.
By choosing, you create the dollars that are left over at the end of the month to save.
Tackle the Big 3 Expenses First
It turns out that households spend the bulk of their income on three expense categories. Housing, transportation, and food are the majority of people’s expense. These three categories make up an average of 54 percent of household income.
Tackle these Big 3 items first, and you should be able to make a noticeable dent in your spending.
As you can see from the chart above, housing makes up 28 percent* of the average household spending —by far the biggest expense.
In fact, research has shown that the main thing that people who accumulate wealth have in common is low housing costs relative to their income.
“If you live in a pricey home and neighborhood, you will act and buy like your neighbors. The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service.” — Thomas Stanley, The Millionaire Next Door
The standard measure of “affordable housing” that personal finance experts advise is to spend no more than 30 percent of your pre-tax income on housing.
However, if you can trim your housing costs down to 25 percent- or less — of your take-home pay, you can really start to build wealth.
We tend to think that the cost of driving is the cost of gas.
No, the long-term, total cost of driving includes the purchase price, interest on the purchase, depreciation expense, registration and insurance, maintenance and repairs, and new tires. All of these things are factored into the federal mileage allowance of $0.58 per mile. Two quarters and nearly a dime for every mile you drive.
I’m reminded of this anytime I drive my own car for work and am reimbursed mileage expense by my employer. Holy Moly. That 100 mile round trip? $58.
Mr. Money Mustache has written a ton of excellent stuff about how expensive cars really are. The best way to think about the real expense of driving a car is to think of how much it costs per mile.
But we do love our cars. I’m right there with you.
One of the dumbest financial moves I ever made was buying a brand new car. (Hey, at least I didn’t lease it! That’s even dumber.) I had to sell it two years later, and I got less than 2/3 what I paid for it.
The best car move I ever made was buying a ‘68 VW bug for $700. I drove it for two years, got into a fender-bender, and then sold it for $1500.
True, this was back in 1990, but the same idea applies. Cheap, reliable vehicles are fairly easy to find.
Mr. Money Mustache also has some excellent advice on buying a low-cost yet reliable vehicle.
You may also want to try using a bike for transportation.
In some ways food is the toughest thing to cut back on because it’s an ongoing battle. Kind of like weight loss.
The biggest culprit in high food expense for most people is the cost of convenience. Both the cost of eating out and the cost of buying pre-packaged foods at the grocery store.
Eating out less and learning to cook delicious, low-cost meals requires ongoing planning and effort to make and sustain a lifestyle change.
But there’s a double-bonus: not only can you save a ton of money on food, but you will likely lose weight and become healthier in the process.
The Simple Dollar has a good list of strategies to radically cut down your food costs.
The Bigger Picture
The point of all this is that your financial picture is as unique as you are.
And that picture is much bigger than whether you substitute black coffee for lattes, Netflix for your 500-channel cable subscription, or margarine instead of avocado on your toast.
Those things do matter. Lots of little expenses add up over time. Especially when you factor in the magic of compound interest on every dollar you spend.
But the big expenses in life — that we typically think of as fairly fixed — are often within our control to make a substantial difference in freeing up money to invest in our futures.
We also have more control than we probably want to admit over how much income we bring in. Side-hustle anyone? (I’d skip the Uber gig, unless you’re fine with minimum wage. )
Big Steps, Not Baby Steps
I have a challenge for you, should you choose to accept: Take a hard look at your spending in the Big 3 areas of housing, transportation, and food.
For each category, brainstorm all the possible alternatives you can think of that might reduce those costs. Don’t reject any idea because it doesn’t appeal to you. Just write it down and estimate the cost and what you think you’ll save.
And then do a second brainstorming session on all the possibilities of earning extra income. (This should be a long list!).
Put both lists in a drawer for a week and let your subconscious mull them over.
Then take those two lists back out and look at them again.
What jumps out at you as real possibilities for reducing your spending rate?
Does it make financial sense to sell that newish F-150 and drive a 5-year-old Hyundai instead?
Or move closer to work so you don’t have to drive at all?
How about a smaller or cheaper house or apartment? Maybe taking on a roommate or two.
Could you start bringing your lunch to work instead of eating out?
What about learning to cook delicious, inexpensive meals to stock your freezer with?
Assemble all your accomplishments at work and go pitch your boss for a raise?
Pick up extra shifts, or a second job? A side-hustle?
While you’re at it, go ahead and drink that daily latte, or whatever small luxury that brings joy to your life.
Then, congratulate yourself for taking real steps to reduce your spending, increase your income and generate real savings. So you can invest in your future.
*28% on housing cost is average across the U.S. There is greater variability in relative housing costs than any other category. Meaning, if you work from home and live in San Francisco, for example, you might want to have your head examined.