What comes to your mind when you read or heard about "latte factor"? Is it about a cup of latte? or some coffee variant? Actually, it's a different way to think about how small expenses can have a big impact on our future.
The "latte factor" was popularized by David Bach in his book "Finish Rich". Rich stated that the "latte factor" is based on the simple idea that all you need to do is look at the small things you spend your money every day and see whether you could redirect that spending source. So once you get a birds eye's view of your daily spending, it will present a much clearer and more ominous picture of your personal finance habits.
What is you latte?
Recognizing the "latte factor" has to do with changing habits that we act on every day. It takes time but it will help if we are able to take a long-term macro look at our spending.
We often rationalise our actions by saying, "Oh, I only spent IDR35,000. So, it's okay!" But, did it ever occur to you that if we spent that amount everyday, it could cost a lot in the end?
It can be the candy we buy to snack on out of sheer boredom, or the cigarettes because we just can't shake the nasty habit. Sometimes it can be a glass of Frappuccino that we buy three times a week while hanging around with our buddies.
The "latte factor" is the unconscious spending on the little everyday things that do not add any value to our lives. Those small, day-to-day purchases, when we reduce the consumption will provide you with a significant, and somewhat surprising, sum of money.
Millennials "drink" the Latte
Being written in 2003, the "latte factor" has become more popular nowdays without people realize. And it can change you future, the way you think and the way you spend. They consume because they see famous people consume, so they want to try to make them more "update".
A recent survey from Bankrate.com stated that in particular, younger millenials (age 18 to 26) are falling victim to vices that may feel good at the moment, but are far from worth it in the long run:
- 54% of people around that age eat out at least three times a week
- 30% of millennials buy coffee three times a week
- 51% typically go to bar at least once a week. (Among people age 21 - 26)
Things we can do
So, how do we, especially millennials manage to amass such serious saving? It's simple! Set priorities and make smart choice. You have to know and understand what you need and want.
The key to saving money is having a budget in place. Millennials may be leading the pack in this regard, with 73% claiming they follow budget in general. Creating a budget is easy. Just list your various monthly expenses, start with the important to unimportant one, factor in once-a-year expenses (like that insurance policy whose premium you pay annually).
Then compare your total to what your paychecks deliver. If the final numbers won't get you very far in terms of your saving goals, then you'll need to start cutting cornert. Try it and you'll find out!