Thursday, April 9, 2015

The Latte Factor and how it can help you pay yourself first

If you're still reading after that last post, good for you...and thank you! I say that because a lot of people stop right there. I mean, here I am telling you that even though you finish up every month totally broke, you're supposed to take money out of your already limited bank account. How is that supposed to work?

I mean, look at my last example. By the end of the month, you have less than twenty bucks left. Where's that savings supposed to come from? It's not like extra money is going to magically appear from the ether.  So I'll tell you that my last post was the easy part. Now it gets just a little bit harder. 

Before I get into the hard part, though, I want to go back to the very beginning of this blog, where I say that I'm hoping you are someone who's pretty sure you make enough money, but there just never seems to be enough left each month. So what I want to talk about now is how you can actually make sure that putting aside a couple of hundred dollars each month won't leave you overdrawn.

My old friend David Bach has something he calls the Latte Factor. Basically, the Latte Factor means that doing without a daily latte will save you enough money to put away a tidy little nest egg.  I hesitate to use this term, since you can find me in line at Starbucks every morning myself, and I don't want to sound like I'm judging you for doing the same. I mean, we all need what we need, right? But his point isn't that you shouldn't drink lattes. His point is that most of us tend to fritter away a huge amount of money each month on very small purchases, and if we want to save money, the easiest way to do it is to identify a couple of things we spend money on not because it really makes our lives better, but because it's such a small amount of money we just don't care.

Back when I was always broke, we used to have a food truck pull up to my employer's building every morning at about 10 AM. At first, it was kind of a luxury; we could step outside and for only a couple of dollars, we could get a hot breakfast burrito or toasted bagel instead of trying to make do with whatever was in the snack machine. After a while, though, I found that I had stopped eating breakfast at home at all, knowing that I could get something during the break. A few months in, by the time the food truck rolled around, I was salivating like Pavlov's dog. At five dollars a breakfast, I was spending 25 dollars a week.

If my kitchen suddenly and tragically exploded one morning and left me with no way to pour a bowl of cereal before I left for work, then five bucks isn't much for a quick breakfast. But for a 25 year old trying to live in Silicon Valley on $24 grand a year, that tiny little amount was starting to add up. I mean, do the math: $25 a week is $100 a month, money I could be putting away. 

I'd like to say that I caught myself in time, but remember that I was even more of a dummy then than I am now. The only difference is that now I make enough money to both pick up a latte each morning and contribute to my growing nest egg.

But I hope that you'll learn from my mistake. For just one week...actually, for just one day...keep track of every dollar you spend. At the end of the day, look back and see if there's a small change or two that you can make. Maybe instead of buying breakfast, you can make it at home. Or if you get the 3 PM munchies (I sure do!) and can't help visiting the snack machine, keep a stash of snacks in your drawer, purse or backpack. Then, keep on paying yourself first.

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