The Latte Factor – 7 Lessons From A Barista
I’ve been a David Bach fan for sometime now and became inspired to pursue financial freedom shortly after reading The Automatic Millionaire many years ago. He’s also written other bestsellers such as: Smart Women Finish Rich, Start Late Finish Rich, and Smart Couples Finish Rich. So when I recently heard that he’d written a new book, The Latte Factor, I was excited about getting my hands on it.
He’s talked about this concept, The Latte Factor, in the past in some of his other books. It shows you that small amounts of money can truly change your life.
In the past, he instructed his audience to forgo some of these “small pleasures” such as a $5 Starbucks coffee and save it instead to become wealthy.
Here’s how he explains it:
The Latte Factor® is based on the simple idea that all you need to do to finish rich is to look at the small things you spend your money on every day and see whether you could redirect that spending to yourself. Putting aside as little as a few dollars a day for your future rather than spending it on little purchases such as lattes, bottled water, fast food, cigarettes, magazines and so on, can really make a difference between accumulating wealth and living paycheck to paycheck. We don’t even realize how much we’re actually spending on these little purchases. If we did think about it and change our habits just a little, we could actually change our destiny.
The Latte Factor
His new book,The Latte Factor, focuses on this same concept except it’s in a story (parable) format. I took his advice from a recent podcast (see the video below) and offered to pay my kids to read the book and write a 2-3 page book report. They were all for it.
Without giving away too much of what the book is about, here’s a brief overview:
The Latte Factor tells a story about Zoey Daniels, a 27-year-old living in Brooklyn. She loves her job working in the Freedom Tower as a travel magazine editor.
Unfortunately after several months, she becomes stressed out after realizing she’s not getting ahead even after multiple raises.
Like many of us, she still struggles to make ends meet under a growing burden of student loans and credit card debt. Basically she’s living paycheck to paycheck.
She then begins a journey of questioning the path of life she’s on after seeing a sign that reads:
“If you don’t know where you’re going, you might not like where you end up.”
As fate would have it, she meets Henry, a barista at the local coffee shop she frequents daily for a latte and muffin.
Henry takes her under his wing and begins teaching her principles of life that she needs to learn in order to really go after her dreams.
Over the next few days, as Henry reveals what he calls the “Three Secrets to Financial Freedom,” Zoey discovers that there’s more to his life story than meets the eye—and that by following the simple, proven path he describes, she truly can create the life she’s always wanted.
7 Lessons Learned From A Barista
1) Pay yourself first
In the story, Zoey is taught the single most important key financially she can do is pay herself first. When people start investing, many times they focus on the wrong things. Until you save up at least $100,000 or more, don’t worry about the interest rate you’re getting. Instead, focus on the savings rate and piling up as much cash as you can.
What does it matter if you’re making 10% a year on $10,000? $1000 in interest isn’t too exciting. But when you’re making 10% on $100,000 which amounts to $10,000, then things start to pick up.
Henry recommended that Zoey save one hour a day of her income into a “pay yourself first” account and to become financially selfish. And by doing this, she can have financial security for the rest of her life.
Think about that. His recommendation is such a simple, yet profound process that hopefully will wake up those of us that aren’t focused on saving on a regular basis.
Why would you work 90,000+ hours of your life and not keep the first hour a day of your income?
It’s a different way to think about money that I challenge you to commit to.
Here’s a chart that he gave her to drive this concept home:
If she saved $5 a day and earned 10% interest, she’d have:
- 1 year = $1,885
- 2 years = $3,967
- 5 years = $11,616
- 10 years = $30,727
- 15 years = $62,171
- 30 years = $339,073
- 40 years = $948,611
If she saved $10 a day and earned 10% interest, she’d have:
- 1 year = $3,770
- 2 years = $7,934
- 5 years = $23,231
- 10 years = $61,453
- 15 years = $124,341
- 30 years = $678,146
- 40 years = $1,897,224
When you pay yourself first, you’re putting yourself first.
2) Make it automatic
If you leave investing up to most people then it’s usually not going to happen. We might start off thinking that we’re going to be diligent enough and invest monthly on a regular basis….but what happens after the first couple of months?
The same thing that happens to people that join a gym after making a New Year’s resolution to lose weight. They get tired of it, life gets in the way and they revert back to what they were doing before. Eating too much and not exercising!
Zoey’s second lesson learned is one of the simplest paths to wealth: making it automatic. Every two weeks, once a month, or however often you’re paid, you set it up with your employer so that your 401(k) contribution automatically comes off the top.
If you’re a do-it-yourself investor, this can be easily set up online with companies such as Vanguard, Schwab or Fidelity.
The important point to remember is to set up a set amount to be taken from each paycheck so it’s out of site and out of mind.
3) Compounding is magic
It’s amazing how much money we spend each day on items that we feel are “insignificant”.
In Zoey’s case she was spending the following by noon each day:
- Latte $4.50
- Muffin $2.75
- Juice $7.00
- Lunch $14.00
- Bottled water $1.50
I understand that we have to eat. But if Zoey could make her coffee at home and bring her lunch to work then she could invest a good portion of the $30 bucks she was spending each morning. This is what Bach calls, The Latte Factor.
Most people think they need “more money” to become wealthy. Most don’t. In Zoey’s case, she was informed, “The solution to your money problems is NOT more money; it’s NEW habits”.
Small amounts of money invested over time turn into a mountain of cash by taking advantage of the magic of compound interest.
Compound interest can be defined simply as making interest on interest.
You receive interest not only on your original investments, but also on any interest, dividends, and capital gains that accumulate—so your money can grow faster and faster as the years roll on.
Here’s an example from Vanguard:
Let’s say you begin with two separate $10,000 investments that each earn 6% a year. In one $10,000 investment, you withdraw your investment earnings in cash each year, and the value of your account stays steady, as you see with the flat line in the chart below.
In the other investment, you don’t cash out your earnings—they get reinvested. The curved line below shows the power of compounding and time. If you keep reinvesting the earnings after 20 years, your investment will have grown by more than $20,500.
And if you’ve got an even longer time frame—for example, if you’re in your 20s and saving for retirement—after 40 years, your investment will have grown by more than $92,000.
For whatever the reason, there’s a large segment of the population that plays the “victim” card when it comes to having control over their finances. They feel that they lack control believing they’re victims of the “system” or the so-called evil “one-percent“. By doing this, they can easily avoid being held accountable.
But the Latte Factor demonstrates that we have far more control over our financial destiny than many would have us believe.
5) Small amounts matters too
The Latte Factor shows us the power that lies in small amounts of money. Basically every dollar that we receive can represent some amazing possibilities.
Here’s 4 areas that most people overspend that could be redirected towards investing:
a. Eating out
On average, Americans eat out twice a week which comes to $232 each month.
It’s only fitting if we’re talking about The Latte Factor that we include coffee on the list. The average American spends almost $15 a week or $1,100 a year on coffee.
c. Unused utility services
Paying our bills blindly can lead to overpaying for services. Some of them we don’t even use. How many of those 900 channels that you subscribe to do you actually watch?
Each month, consider taking a few minutes to review your bills to determine if you really need the services you’re paying for which could lead to a big savings.
d. Online purchases
The internet makes purchasing items simple. As we go about our week, we tend to make small purchases such as books or clothing items and these can seem insignificant individually. But over time, these impulse buys add up to a very significant number—the very definition of the Latte Factor.
Dave Ramsey once told a caller, “We buy things we don’t need with money we don’t have to impress people we don’t like.”
Most research tells us that spending money on stuff isn’t going to make us any happier.
If you take a look at what you’re routinely spending money on you’d find that it doesn’t bring you a great deal of joy. If you challenged yourself to forgo some of these for a month, I think you’d find that you don’t miss them quite as much as you think.
This is true whether we’re talking about that daily cup of coffee, the 700 DIRECTV channels, or a third car that hasn’t left the driveway in two years.
7) It’s not about the latte
I don’t want you to misunderstand what Henry is trying to teach Zoey. He’s not telling her that she can’t ever drink lattes again.
The Latte Factor is nothing more than a metaphor.
It could be anything people spend extra money on that they could live without such as:
Here’s how Henry described it to her:
“The latte factor isn’t about being a penny-pincher or denying yourself. It’s about getting clear on what matters. It’s about the little daily extravagances and frivolities, whatever they may be – the five, ten, twenty dollars a day that you could just as easily redirect toward your own future. From spending on yourself to paying yourself first. It’s about giving up something small to get up to something big.”
His point to her isn’t that she can’t ever spend money. (That wouldn’t work with Mrs. DFD either!) He wants her to enjoy life, buy a new outfit or go out to eat. But with one catch, always pay herself first.
I used to stress about saving enough and whether I could buy larger items or not. Once I figured out “my number” or how much I needed to invest in order to retire happy, it made it much easier to make financial decisions.
Remember, most people feel that the solution to all of their money issues is to make more money…but it’s not. The solution is new money habits. Most of you reading this blog already make enough to build massive amounts of wealth and become a millionaire many times over.
Just as Henry taught Zoey, you ARE richer than you think. Most people save little to no money because they many times don’t see the point. They talk about getting a bigger house, nicer car, or a vacation home but must realize that none of those things matter. It’s what those things bring you that matter.
My challenge to you is to figure out what matters to you now (not later), and follow that.
Will Cutting Coffee Make You a Millionaire?
If after this discussion you find yourself asking the question, “Will Cutting Coffee Make You a Millionaire?”
Then check out this podcast from The Money Mastermind Show:
Click HERE for more information