What is Your Latte Factor?

Seven out of ten people describe themselves as living paycheck to paycheck. Half the people in this country could not put their hands on an extra 400 dollars in an emergency. Many put everyday living expenses on credit cards to be able to live life. Personal finance has intrigued me in a huge way in the last few years. The fascination of the psychology of how we spend our money and where all our money goes. Many people have no idea where their money goes until they check the bank account and there was an overdraft fee. They have life on autopilot as they swipe their cards for coffee, clothes, expensive food, and other items. I have immersed myself in this personal finance through the form of podcasts, YouTube videos, me writing blogs, and reading some books. I picked up a copy of The Latte Factorwritten by David Bach and John David Mann. This is the second self-development book with great information wrapped in a fictional story. Much like the 5 AM Clubwhich will be another book review coming in the future. This book’s story focuses on Zoey, “the travel editor who never traveled.” She didn’t travel because “in the song of her life. The chorus was I can’t afford it.”

“Earnings are like the tide and your spending is like the boat. When the tide rises, the boat rises.” At the peak of my post office days, I would bring it around five grand of post-tax dollars on a regular month. This doesn’t count the huge spike weeks from around the holidays when I would bring in close to seven grand. This gave me the comfort to splurge on a few more things. I made my eating the most quality ingredients I could find. I made my bathroom extremely advanced and dumped a lot of money in there. I took a three-thousand-dollar class on shoe making. I was able to put in five grand in a ROTH IRA and put 25 grand in individual stocks like an idiot. I lost a good chunk of that money once the market dropped significantly and I was a dummy and pulled out a good chunk of my remaining money. While I was in the post office, I was just seeing what time of home loans I could get. There were great first-time homebuyers’ loans where I would only have to put up 3% down payment and my monthly mortgage would be 2000 a month for a 250,000 house. This didn’t include the property tax; mortgage insurance and other insurances and I was looking at 40% of my income just in a house payment bringing in 60 grand a year of POST-taxed money. I got cocky and figured I could afford that. If you added a car payment on top of that my expenses would have been maybe 80% of my paycheck. I ate out more, I went on more trips. I was technically not full-time so I would have to pay for private health insurance if I wasn’t on my parents. If I went through with that loan I would have been screwed for years. It would have been sold in two to three years. My boat was rising with the tide. If I continued on that path my boat would be submerged rather quickly. Many people are like this. They bring home 20% more and their spending immediately goes up 30%. I know a guy that had his decent income double, and he now qualifies for a 600-thousand-dollar house. He also wants two new cars at forty thousand each. While being 75 thousand dollars in school debt. He takes several lavish vacations a year. His paycheck allows him to grab all these things with less stress. He knows he has another combined income of 10 grand coming in next month. After those ridiculous 80 thousand dollars of car payments, huge house payment, other debts, and insurances. He would probably have less discretionary spending money as before he got that income that blinded him into getting more stuff than he needed. I crunched these numbers in rough calculators and the total is six thousand dollars a month in just those three things, 60% of your income gone. Add in a child, food, other miscellaneous expenses and they end up saving less money. This is a huge trap that people fall into. Just because you qualify, doesn’t mean you can afford it.

A great lesson spoken in this chapter, some new insights, others that needed to be heard again. PAY YOURSELF FIRST. After I put my sum of money in my Roth IRA, I stopped contributing to it as I didn’t make enough. I am losing some of the best years of my life in interest by not putting anything towards retirement. The author spoke about a 401(k) and them taking out five dollars a day out of your paycheck which would leave you with a taxable nest egg of just under a million dollars if left in for forty years with an annual return of 10%. A price of a morning coffee could snowball you into a millionaire if you start early enough. If you are able to save 20% of your wages for investments that is usually a simple way to go about things if you have the funds. 50% needs, 30% wants, and 20% for investing. That is setting you up perfectly for the future while being able to enjoy the time you have now. If you invest 600 dollars a month in a 401(k) the nest egg gets over three million dollars if it is left in for 40 years with an annual return of 10%. Pay yourself first, your first hour of gross wage put it into a company investment plan that hopefully has a matching element. Your money doubles immediately as you put it in. PRE-TAX dollars. When you withdraw, Uncle Sam will take his cut. If you take care of yourself first, you will have the ability to help the next generation while also taking some trips to Hawaii and enjoying retirement. In one of the strangest occurrences from this blog was a lady I spoke with today. She said her mother that just recently passed was able to afford two large homes with no mortgage that was passed down to her children. She was even able to buy one with cash straightaway. She happened to be a single mother with three children as her husband died at 27 years old. She gave her daughters a piece of advice about money. It was pay yourself first. My mouth nearly dropped when she said that because I just read in this book that it was a thing. Best believe I am listening.

Making it automatic is another lesson in the book. Make paying for yourself automatic, make sure you don’t see that money, it doesn’t exist. It goes out the same way that Uncle Sam takes his cut out. It is much harder to go through all the trouble of putting money into an account yourself. Luckily, with most employers they have options where money can be immediately taken out and forced into your 401(k). That money that leaves your account doesn’t even bother you and it doesn’t get in your undisciplined hands. Similar lesson with enforcing quality habits. Make them as easy as possible.

We hear some more fictional characters’ stories, and they had the reverse of positive compounding. They had the glorious credit card debt that many people experience. They didn’t know how bad it was until they finally stopped spending and looked up to see late bills, an extremely low credit score, and all of that glorious interest that could stack up to double the original amount if you continue the minimum payments. The fictional characters also suffered marriage problems due to the money situation which is a large reason why couples split up. If money is taken care of then that is one less problem to deal with together.

We learn of a few money myths in the next section of the book and the authors work through them. The first one was making more money and you’ll be rich. This isn’t the case. There are so many professional athletes that get paid millions of dollars and then end up broke a few years later. They didn’t save any for a dark day they just continued to add expenses until the expenses caught up with all the money coming into their account. An injury could happen the next game and their career is done, no more money coming in. I spoke earlier about how when a person increases their salary then their expenses go up as well and this is a key takeaway here. The next is need money to make money. The five dollars a day is 150 dollars a month that can possibly turn into a million dollars after compound interest takes over for enough time. Even a dollar a day can make a big difference, taken straight out of your pretax paycheck will pay large dividends in the future. The last myth they speak about is that someone else will take care of you. While some of these situations happen, you would rather be able to lock YOUR future down then hope on someone else. Don’t put all your eggs in one basket. The person who rakes in the money for you could pass away tomorrow and leave you with nothing but debt. Health and wealth changes have to be made by you. Do not put it in the hands of others. Please take whatever action necessary to secure your future.

The latte factor was explained in the book, The Latte Factor, by the fictional character that was very successful. Just more talk on how to pay yourself first instead of spending. Each day the character would get coffee, breakfast, go to the juice bar, eat out for lunch, get a second coffee on the way home and then out to dinner. She was giving up 50 dollars a day in that and couldn’t save five dollars a day to take it automatically out of circulation. If it isn’t in your account, you won’t spend it. The spending habits was the problem, not how much she made.

The authors have spoken about making your saving automatic to your 401(k) but now we take another step further and we decide to live for now. A dream account that you automatically take out a price you can afford that goes into a fund where you can buy things you didn’t think you could before. The example in the story was a 600-dollar photography class which she had been trying for years to do but never could scrape up the money. The expert told her to make a $3.50 transfer each day automatically going to the “dream fund” which would turn into 600 dollars in six months. It seems so easy. That way you can save for forty years in the future but also save for the near future. I just took this advice as I just made my saving automatic for a cruise I want to take in November. I did the math, and it is forty weeks away and with me just saving twelve dollars a week I will be able to pay for my cruise in full. No worrying about where the money will come from. I know exactly where it will be from. It will be from my 40-week past self. This will be to live the lessons of this book. The three keys they speak about. Pay yourself first, make it automatic, and live rich now.

Finished the book today with most of the lessons already wrapped up the authors spent more time on wrapping the narrative up. Of course, it was a happy ending with the main character who automated her finances with saving up for vacations, photography classes, and didn’t even have to switch jobs to make more money. I don’t know how many coffees she was skipping but she was able to take a yearly six-week vacation where she went to Greece, the mountains in the Midwest, Maine, and the upcoming year to Alaska. After the story ended, the graphs and tables came and my goodness these numbers were really something. If you invested 100 dollars a month in all sorts of rates of return and years invested was a great table. If you save $100 a month at 2% average rate of return for 40 years, it would be over $73,000. Even hardly saving and shitty rate grows your initial investment six times! Time is your most important asset. Explained once again in another table where we have two people side by side. One invests two-thousand dollars a year for seven years in a row, 19-26. The other invests two-thousand dollars a year for 38 years, 27-65. With a 10% average annual return on both, the first person will have over two-hundred thousand dollars more even with 30 years less of investing. Growth over more time is a tremendous advantage. Another table shows the cost of a pack of cigarettes a day put into a mutual fund instead with an average return of 10% a year. In ten years, that is 43,000 dollars. In forty years, it is 1.3 million dollars. Not to mention the health benefits of kicking that habit.

This book was eye opening. The math and the graphics really made this book a must read to anyone out there making a decent wage with it disappearing overnight. Really take hold of your finances and live for the future and today. 7/10 Love the math behind the finance portion but not really much of a fan of the self-development mixed with fiction stories. It gets a bit eye-rolly at times.