Show of hands if your work commute includes a stop at your local cafe. No biggie, right?
Actually, wrong.
Those perfectly poured lattes might be costing you more than you think. Thanks to financial commentator David Bach’s theory, The Latte Factor, the spotlight is on incidental spending – those small, seemingly innocuous purchases for things like coffee, magazines, bottled water and fast food – and financial experts are urging you to reign it in if you want to achieve financial freedom.
You see, these discretionary expenses add up to big numbers over time. Here are four reasons why you should slow down on the small stuff.
1. Compounding interest
Choosing to invest instead of spend that $5 a day could mean the difference between a comfortable retirement or not. It really is that profound. Why? Because of compounding.
Here are the stats according to Bach’s Latte Factor Calculator: if you invested $5 a day at 6% interest, that adds up to a staggering $71,161.73 in 20 years. That’s a huge boost to your retirement nest egg, isn’t it? Remember that next time you place your coffee order.
2. The gift of time
The earlier these discretionary expenses are saved the better, thanks to the gift of time. If, at 20 years old, you choose to make your own coffee, pack your own lunch or park just that extra distance away to save the parking metre, you’re doing your future self an amazing favour.
Take the above example. An extra 10 years of investing $5 a day at 6% interest would take your $71, 161.73 to an impressive $152,938.06. Our point: start today!
3. Conscious spending
Consciously choosing how you spend your money rather than just flitting it away is one of the most powerful ways you can gain financial control. You vote with your dollar, so really thinking about how and why you’re spending before making that purchase is critical to your overall well-being.
Could reading a book give you the same satisfaction as your morning coffee? Are there other things in your ‘small spending arsenal’ you could forgo? Are you seeking instant gratification and can that need to fulfilled in a different (free) way? Consciously considering every purchase you make is a guaranteed way to ensure satisfaction with your purchases, so choose wisely.
4. You are in control of your future
Perhaps one of the most exciting elements of The Latte Factor is that it returns the control of finances back to you, the spender. You suddenly become accountable for every little dollar you spend, armed with the knowledge that small amounts do add up to something of value over time. So next time you feel like you ‘don’t have enough money’ remember that, if you choose to, you can make even $1 a day work harder for you.
Rebecca is passionate about promoting the positive impact of quality financial advice on personal wellbeing. Read her full bio here.
