The Latte Factor: Not For Coffee Lovers
A good investor knows that most of investing is simple psyche 101, understanding people and what motivates them. That’s why the common advice, made popular by David Bach of the Finish Rich book series, of saving money on “little purchases such as lattes, fancy coffees, bottled water, fast food, cigarettes, magazines” makes me a tad bit crazy.
Little purchases? Find me a smoker that thinks cigarettes are a “little purchase.” Find me a coffee addict that thinks coffee is a “little purchase.”
Sure, the numbers make sense. On Bach’s website, he shows how a dedicated investor can take $5 of coffee savings a day and turn it into $948,611 in 40 years (at 10% beating most mutual funds but again, that’s a whole other post).
Wow. Impressive, right?
Except that in order to do this, the investor must kick a habit like drinking coffee or smoking. Not an easy thing to accomplish.
I know. Once upon a time, I was addicted to Diet Coke. Addicted, as in I had to have my hit every single day. I loved investing then (and still do) and I knew that I was wasting money on my cola a day habit so I tried quitting numerous times. I went through withdrawal (I was one grumpy bear…with the shakes, not a good combo) but I just couldn’t do it.
Forget a million dollars in 40 years, you could have promised me a million dollars a week from then and I still couldn’t do it. The motivation was not enough (I finally quit after developing a caffeine intolerance).
Any investing program requiring the participant to kick an addiction first is doomed to failure (only 2% of unaided attempts to stop smoking succeed even with 70% of all smokers wanting to quit). Actually any program requiring deprivation has a high chance of failure (negative motivation is substantially weaker than positive motivation).
That’s not saying that Bach’s advice is garbage. Far from it. Applied to expenses with no emotional connection to the investor, this advice rocks. It’s a great source of seed money.
I don’t mind shopping around for a few minutes to pay $500 less on insurance (for the same coverage). That $500 is the equivalent of 100 lattes but a lot less painful to the coffee lover.
Not a car fan (I only care that I can get from point A to point B safely), I don’t even mind paying $10,000 less by buying a good quality used car over a shiny new one. Heck, make it $9,998. I’ll spring for a new car scented air freshener. That’s the equivalent of over 5 years worth of lattes. Again, a less painful switch.
Just don’t ask me to give up my addictions (now Diet Ginger Ale and travel and steamy romance novels and…).
Kimber doesn't understand why personal finance has to be so darn dull and complicated. Past mentors have taken the time to break the process down into simpler steps and language. Kimber now passes these learnings along to readers at www.nolimitsladies.com.
12 Comments Add your ownSubscribe
1. Vince | October 30th, 2006 at 10:40 am
Personally, I would seriously take up a “bad” habit such as drinking “diet” anything.. and then kicking it if somebody promised me a million dollars a week from then. =P
Don’t worry, your dramatic license has not been revoked yet. =)
2. Vince | October 30th, 2006 at 10:48 am
BTW, I for one do not understand bottled water. There has been no evidence that it’s healthier. It comes from the same source, and it cost more than gasoline!
3. Kimber | October 30th, 2006 at 11:08 am
Vince,
Have you ever been seriously addicted to anything?
No drama (well, maybe a bit). Diet Coke made me very, very ill (freak caffeine intolerance) and I still had severe difficulties kicking the habit. Was getting to the point of choosing that or a hospital stay (sort of like the smokers battling lung cancer). So yeah, money wouldn’t have been a strong enough motivator for me.
As for bottled water, what I really don’t understand is no name, generic bottled water sales. At least with a brand name (Dasani, Aquafina, Evian), the manufacturers have something to risk if the quality is not all that. With generic, well, I would feel safer with tap. I know where tap comes from.
4. Kimber | October 30th, 2006 at 11:10 am
Oh, and I should qualify my bottled water statements by saying that I did a decade long stint in beverage (including water).
Yes, the brand name folks do filter, filter, filter (even more so than the water used in carbonated soft drink production).
5. prlinkbiz | October 30th, 2006 at 11:24 am
I am a girl who loves her coffee. Like Kimber, there are many things I can and will do without in order to create some extra cash to invest with. Giving up coffee, has never been one of them. If I’m bootstrapping for something, I restrain myself to drinking homemade mochas at home. However, I would rather increase my means and afford the lifestyle and things I want, than live my life always denying myself eveything. So I find ways to create $ each month to more than cover my vices.
Frugal Duchess had an interesting post about Starbucks the other day. The comments were funny because in it, it turned out that Starbucks was offering a less expensive social connection than say, going out to eat! Who would have thought Starbucks would be the frugal alternative? It;s al a matter of perspective- something I think Kimber nailed.
6. Joe Paravisini | October 30th, 2006 at 12:31 pm
I hate to be the negative one, but it sounds to me like you would rather just take the easy way out.
After looking at the numbers that I spent on coffee, I decided to invest in a quality coffee brewer (the technivorm at $200) and roast my own coffee (at $5 a pound for top notch gourmet coffee, and a $15 popcorn popper, you can’t go wrong), turning my $4-$8 a day coffee habit into maybe $1 a day tops. I didn’t quit, I just made the expense actually reasonable.
Cigarettes, i kicked cold turkey. It sucks, you hate life for a few weeks but just do it, the bring you nothing good.
Point is, don’t allow retarded expenses to continue. (buying coffee in latte form from a cafe means you spend $90 a pound on coffee, go search around and buy yourself a nice espresso machine and it will pay for itself in a couple of week)
If you have a daily habit that seems to be getting out of hand, and you love it, don’t quit, figure out a cheaper alternative. If the habit is soda, buy in bulk. If it is coffee, make your own. Don’t give up because of convenience’s sake.
7. Kimber | October 30th, 2006 at 1:02 pm
Joe,
You’re absolutely correct.
I am all about simple and easy.
That’s why I’d prefer not to link two difficult things (kicking a habit and investing) to each other.
Why ask the intro investor (Bach’s target market) to kick a habit before investing when they could do something simpler like shop around for insurance instead?
You also have a great point suggesting less expensive way to get our fixes.
8. Phil John | October 30th, 2006 at 3:10 pm
Never understood starbucks.
I drink tea made from tea bags. Couple of bucks for a 100 pack.
Bargain
:D
Phil
PS Last time I went there I had something with cream on it though - it was cold and I think had vanilla in it. Very tasty.
9. Jason | October 31st, 2006 at 9:47 am
Starbucks should start a bank. You go into their cafes and can either buy a coffee or deposit $5 into savings… maybe Starbucks stock. What if they promoted a Starbucks card that put x% into an account every time you bought a drink? Could be an opportunity to take advantage of (and poke fun at) the latte factor thing.
Great article, Kim.
10. Jason | November 1st, 2006 at 11:19 am
Some more silly calculators at this site:
http://www.hughchou.org/calc/
Here is one for Starbucks:
http://www.hughchou.org/calc/coffee.cgi
Our very own frugal Nick blogged about these sites and their creator:
http://www.1stmillionat33.com/2006/11/muffin-calculator-for-little-savings-that-goes-a-long-way/
11. Doug | November 25th, 2006 at 1:00 pm
Kimber, I agree with your overall point entirely - which is that many of these “little luxuries” are the stuff that make life worth living. I mean, sure one COULD live as a monk, but would you find such a life fulfilling?
I went to a money seminar once where the speaker talked about Coach bags. Now, I’m a guy, so this is completely irrelevant to me, but his point was, how important is it to have this “fashionable” handbag? In my mind, he went about it the wrong way, because he tried to find things wrong with the bag. Rather than be negative about the thing itself, I suggested that instead he and the other people think about what else they might want more. Don’t think of it as “have the bag, or not have the bag” but think of it as, which is more important, that handbag, or having enough money to take that vacation, or to retire, etc. The secret is to make choices between things you want. This is the essence of resource and asset allocation - focus on your priorities.
Now, I realize that lots of PF mags and sites focus on all of the things you can “do without” to save. But that misses the point to some degree. The goal is to have a life that lets you *mostly* do what is _really_ important to you. If you think Starbucks is _really_ important, it’s ok, but the question is, what are you prepared to go without in order to have it.
This is why people need budgets. Most people believe that they are constraining because they look at them the wrong way. In my mind they are really liberating, because they free you from what I call the curse of the checkout line. When you are in the store standing on line, your choice is between having the thing and not having it (fulfillment, however fleeting, and denial). If you think your budget is forcing you to deny yourself too much you see it as constraining and then you start cheating. This is especially the case when people go on the “belt tightening” mode, where they are trying to make up for past overspending. The change can be particularly jarring. But the secret is always to see the choice not between the thing and not the thing (which always feels like denial), but between this thing and something else. It’s much easier to say, no I’m saving my money for xyz than it is to say, “I can’t afford it”.
Ultimately, while I think the reminders about the little things adding up is important, it is also important to realize that sometimes those little things ARE worth it (this is what the PF mags overlook), the key it to know that BEFORE you go into the store.
12. adult chat line&hellip | September 22nd, 2007 at 3:11 am
adult chat line…
The Latte Factor: Not For Coffee Lovers…
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