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WHY CUTTING OUT YOUR LATTE WILL NOT MAKE YOU RICH

WHY CUTTING OUT YOUR LATTE WILL NOT MAKE YOU RICH

I would be a gazillionaire if I had a dollar for every time I heard someone say that to get rich all you have to do is cut out your daily latte. So many articles on budgeting seem to boast this advice. One guy has trademarked the phrase Latte Factor™! There is even a facebook tool and an app for that! Check out David Bach’s Latte Factor.

The premise of this approach is that lots of little expenses over time add up to very large sums of money. So all you have to do is cut out your morning latte and hey presto (after 30 years) you’re wealthy. Seem legit?

At first glance the numbers can seem convincing. Instead of spending $3.50 every morning on a latte, save the money. Over a 225-day work-year, that’s a saving of $787.50. In this case we’ll call it ‘avoided spending’. If you were to invest this amount at say 5%, after 30 years you would have $76 500. This is made up of $37 500 in avoided spending (allowing for the fact that coffee prices rise every year) and $39 000 in interest earned. Because of inflation that $76 500 is only worth $32 500 in real terms.

According to the same argument, avoiding your morning latte should stop you from gaining 196kg. So a 55 kg body according to this, would balloon to 261kg over 30 years by consuming a latte each day. This is nonsense, but it uses the same rule.  

It’s the game of economists who love to say ‘..assuming everything else remains constant’. And as you and I both know, nothing remains constant. This doesn’t mean you shouldn’t cut your spending.

Sherpa Says: Spend less than you earn and make the rest work hard for you.  

Sure, if your morning latte isn’t important to you, cut it out. But for some, it might be a highlight of their day. Certainly my morning heart starter is a very strong short black, no sugar; this and the newspaper is an important part of my daily ritual. Cutting it out would be the worst form of torture for me. The point is, there are less painful ways for me to cut $17.50 from my weekly budget.

What WILL make a Difference:

Don’t sweat the small stuff. This is the way of the Sherpa.
Vince

Vince Scully | LifeSherpa

With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Before creating LifeSherpa, Vince founded the Calliva Group; a fund manager, product issuer, adviser and lender. Vince is an adviser to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie Bank’s infrastructure team.

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