Have Your Latte and Drink it Too

Jim Wang is the financial expert behind Wallet Hacks, a personal finance blog that shares his best strategies and tactics for getting ahead financially. He says that it comes to savings, don’t sweat the small stuff and think bigger picture.

I drink coffee every morning. I get it from a drip coffee maker because I can schedule it ahead of time and it makes decent coffee. It’s not the best coffee in the world but when my eyes first open, almost any will do. Sometimes, I don’t make drip coffee and instead I buy one from the local coffee shop. It’s Ethiopian drip coffee and I don’t know what it is they do to make it, but it packs a punch like no other.

Years ago, David Bach made a name for himself coining the term “latte factor.” The idea is that these constant expenses, such as a daily latte, are a drain on your finances and that if you could eliminate them, you’d be far wealthier.

Mathematics says he’s right. Save $2-3 a day and you will retire far wealthier. Brown bag your lunch each day and you save $5-15 a day.

Psychology says good luck. If you enjoy a cup of coffee a day and your preference is to get it from Starbucks, try going cold turkey. You might be able to do it for a week or a month, but you’ll be back. The one morning you forget to set the coffeemaker or you’re in a rush out the door, that’s the last morning you ever look at that drip coffee maker. It’s just so much easier and convenient to buy coffee and most people aren’t sufficiently motivated to make their own coffee to save a couple dollars.

It’s also an example of inefficient effort. It feels like you’re saving a lot when you switch from Starbucks to home brewed drip coffee because brewing coffee at home takes so much more work. In reality, it’s inefficient. Each time you brew your coffee, which takes about ten minutes, you’re saving at most $2-3. If $2-3 a day matters to your budget, you wouldn’t have been going to Starbucks in the first place!

I believe the latte factor is a factor but not the one you should be focusing on. Instead of finding things that require work each time to save money, like brewing your own coffee or making your own lunch, why not focus on work you can do once that results in major savings down the road?

Instead of looking at saving small, where can you save big? Where can you use human psychology in your favour to help you save? Take a few minutes to review your retirement savings plan right now. How much are you contributing to your RRSP and your TFSA? Do you have room in your budget to contribute more? If so – do it. And drink your “expensive” coffee without guilt because you know you have your savings set up already!

What about monthly expenses? Have you considered renegotiating any contracts you have, like your cell phone or cable service? How much do you pay for your internet and cable television? When was the last time you renegotiated it? If you aren’t under a contract, you should renegotiate right now and it can easily save you more than $50 a month. In one twenty minute phone call, you can save $50 each and every month for as long as the contract lasts. Or you can try to skip coffee in the morning and save $2.

Not everything is about cutting back or restricting yourself – there are ways you can spend a little up front to save big in the long run. If we go back to the latte example, rather than forcing yourself to make drip coffee for maximum savings, what if you bought a single serve instant coffee maker? I recently bought a Nespresso, which makes delicious espresso drinks in about 30 seconds. It wasn’t cheap but if an espresso is just 30 seconds away and costs under a dollar, there’s no reason to ever visit a coffee shop.

Those are three easy examples of how taking fifteen minutes right now can set you up for financial success throughout the year. There are a litany of those examples everywhere once you take a look at where you’re spending money and whether there are steps you can take to lower it.

The views and opinions expressed are those of the author and do not necessarily imply endorsement by Manulife.

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