Monday, 30 July 2012

The Latte Factor


Do you know how much you spend on little whims? A fiver here, maybe a couple of pounds there. The problem is that it all adds up!

David Bach, author of many personal finance books such as The Automatic Millionaire, discusses the concept of the “Latte Factor”. This phrase describes small but regular spending, for example a daily latte on the way to work, which slowly adds up into a huge annual expenditure.

Is a daily latte really the end of the world?
Will small, regular expenses really break the bank? Maybe you buy lunch at the shop around the corner from work every day, at a cost of £4. That's £20 a week, which is £1000 a year, and over the course of a working lifetime that's a significant amount of money that you could have spent in other ways. It also works out as 7 weeks' worth of work a year at minimum wage.

It's important to keep your life balanced though. If you can't spend a planned amount on things you want but really don't need then you might spend all your life waiting to be allowed small luxuries.

Xin Lu made a good point in her article on WiseBread; I believe that saving money should not be a punishment, so when you deprive yourself of a tiny expense that makes you happy, the whole exercise of saving money will become a negative experience ”.

If you add a small Latte Factor to your budget and use it as motivation to save money in other areas, it might actually be saving you money in the long run. You may well be less likely to rebel against an oppressively-tight budget and go on a mad spending spree!

Conclusions
I believe as long as you have the money to do so (not a credit card!) a small weekly budget of “fun money” can be a worthwhile use of your cash. You can use it to go for dinner with your friends, or save it for a trip somewhere, or just spend it on a latte, whatever you fancy. It's your money to spend as you like, so you don't have to wait until retirement to enjoy what you have!

5 comments:

Pamela said...

Exactly! I think if you cut everything out, you're more likely go back to being more of a spendthrift. It's like going on a very strict diet--you think about what you're missing so much that when you cheat or stop, you do so spectacularly.

cumbrian said...

"All work and no play make Jack a dull boy" - Or so the saying goes.

I think it's finding the balance, and everybody has their own ideas of what's reasonable.

As long as you're happy with it.

skipandscatter said...

Good point!

Lili@creativesavv said...

I love David Bach's books. They're very motivational to read. I love tallying up how much we save by not having a Starbucks habit, etc.

But you're right, you do need to have a bit of fun in life. It just needs to be intentional, thought out, chosen, not just fallen into.

In our budget we have a set amount of money per month set aside for things like vacations, meals out, and yes, getting a Starbucks. It all fits into the plan.

It must be working, because we've been at it for 26 years now, and our savings continue to grow, despite having a bit of fun now and then.

gotthisfar said...

Never heard of David Bach... must investigate. I love to read things like that. Thank you!