What's the best way to build wealth? Most people think the more money you make, the more money you will have. While there is a correlation that those with wealth typically have higher incomes, building wealth is not just about more income.
In my travels, people often tell me how they would save more money if they made more money. Yet, more often when they got raises, they increase their spending and not their savings. Even if you make a lot of money, it doesn't necessarily mean you're building wealth. That's because the more we make, the more we tend to spend. According to David Bach, author of the Automatic Millionaire, “That's why there are all kinds of six- and seven-figure earners out there who are broke and in debt.”
What is the Latte Factor?
David Bach coined and trademarked the phrase “Latte Factor”. It is Those small, day-to-day purchases that, when eliminated, can actually provide you with a significant, and somewhat surprising, sum of money. It really comes down to finding $5 a day that can be saved and invested.
What does five dollars a day mean to you?
Five dollars a day is $150 per month. Would you like to save an extra $150 per month? What's the value of $150 per month 10 years from now? At 10%, you will have an extra $30,000 from the Latte Factor alone. Over 25 years, five dollars a day will get you over $185,000. It's amazing how such a small difference each day can make a huge impact over time.
There's something I call the Double Latte. What if you could save $10 per day? It's not as hard as you might think to cut out $10 per day of spending. Over 25 years, you will have almost $375,000. In fact, you would have $1 million dollars after 35 years with the Double Latte Factor.
And finally there's something I call the Espresso Factor, which is simply the Latte factor with more kick. Every time you get a raise or every year, just increase your savings by 3% to 5%. So instead of saving $150 per month, you might save $155 after a year. What does the Espresso Factor do to your wealth? If we compare the Latte Factor to the Espresso Factor, you will have 12% more money after 10 years. After 25 years, you will have 27% more money. In other words, you will have an extra $100,000 simply by increasing your savings by 3% per year.
How long before you can accumulate $1 million?
With the Latte Factor or $5 per day of savings, it will take you 42 years to save $1 million dollars. At $10 per day, you will reach $1 million dollars 7 years sooner. Add in the Espresso factor and you can knock off 3 years to get to your $1 million.
Remember, it's all about small steps.
The Latte Factor brings real meaning to the saying that small steps make a huge difference over time. In the investment business, the magic of compound interest really is magical. The more time you have the better. Here are a few real life examples of the Latte Factor at work:
- A coffee and a muffin at Second Cup = $3.50 per day
- Bring your own lunch instead of buying lunch = $10 per day
- Buy pop in bulk instead of at the convenience store = $1 to $2 per day
- Rent movies instead of going to the theatre = $50 per month
- Drive less, walk more
- Drink boiled water instead of bottled water = $2 per day
- Pot Luck parties instead of going out to restaurants = $50 per month
The Latte Factor is all about becoming wealthy on your current income, without living like a hermit or depriving yourself of the rewards you've earned? The bottom line is success has less to do with income and more to do with smart lifestyle choices. Today's financial decisions really impact your financial future in a big way.