Money in the Media #11

The Latte Factor

For this Money in the Media Monday, I’m going to get you in on a little secret… The Latte Factor was Never About The Coffee. That’s right. The man who named the idea of the latte factor was not actually saying that you can’t have coffee if you’re poor. This week’s Money in the Media Monday we’re looking at David Bach’s book “The Latte Factor.”

First, let me explain the flawed version of the latte factor that a lot of folks have misconstrued this concept as. The latte factor has been thought of as the attack on those who cannot save money while still buying their morning coffees and has incorrectly become a symbol that if someone is buying a morning coffee without perfect financials, they are in the wrong.

This is incorrect. The latte factor was a term that David Bach coined in his book “The Automatic Millionaire”, back in 2003. This term was his way of creating a catchy phrase for the “small leaks sink great ships” concept. We’ll dive into this concept a bit more as we get into “The Latte Factor.”

First, Some Criticism

Not to say that I didn’t enjoy this book. I just want to get some fairly obvious criticisms out of the way first.

First, this book is written from the viewpoint of a 27 year old woman. As a millennial myself, I would have appreciated if the author had had a millennial woman read this book prior to publication. Some of the interactions where he attempts a text conversation and phrases he thinks a young woman would use are….rough.

Second, as a woman who works in a male dominated field and gets constantly mansplained concepts that I already understand, this can possibly come across in that same vein. However, David Bach’s states that most of his financial upbringing and base knowledge comes from his grandmother. Based on this and that many women do not receive the necessary financial education due to outdated ideals, he has made it a centerpiece of who he is as a financial advisor to help right this wrong. So, while I do not necessarily agree with this criticism, I certainly understand where it is coming from as the main characters of the book are an older man explaining to a younger woman the principles of finance.

Where This Book Gets It Right

It Talks about the Why

It isn’t your normal personal finance book that just lists out things that you should do in order to get your finances in order. What the Bach does is take a real, modern person and have them start with why what they are currently spending their money on isn’t going to get them where they want to go. Henry, the older gentleman in this book, has Zoe, our main character, evaluate what she really wants interspersed with some financial knowledge.

If you don’t know where you’re going, you might not like where you end up.

Importantly, it doesn’t kick in for Zoe until she has a major life event occur and realizes that she isn’t currently doing what she wants, but she can use the tools that Henry has given her to get there. Once she finally has her why, everything clicks.

Short and Sweet

Not only can the entire book be read in a couple of hours, but each financial lesson is short enough to fit into a conversation between Henry and Zoe. Not only this, but Bach writes this in a way that has her go off and think on her own about why what Henry said may not apply to her and ask her friends for their input. This is completely realistic and exactly what we would all do when receiving advice that go against the way we live our day to day lives.

The Finance Lessons

Henry breaks it all down to 3 key financial lessons for Zoe. Each one moves her a little closer to her goals of where she wants to be

Pay Yourself First

I love the way that Bach breaks down the workday in this book. This is how most spending looks when broken down in to the average 8 hour workday:

This is how it should be when paying yourself first.

The key difference is that while most needs and wants can feel like your income is still yours, it’s different than saving it either for retirement or for a goal/dream of yours. Buying things and paying off debt is all money that goes to someone else. It’s not really yours. Saving money for your future and to build life the way you want it. That money is truly yours.

Don’t Budget- Make It Automatic

Most budget methods DO NOT WORK. Yes, I am saying this as a financial coach who wants people to make budgets. The key is to make a budget in order to figure out what your true costs are and once you’re out of a real paycheck to paycheck scenario automate everything; your savings, your debt payments, regular bill payments.

The sooner it is set up to be taken care of and off of your mind is when the true stress relief begins. From here, you are free to live your life largely not paying attention to your finances, but with the added security that everything is already setup to be completely taken care of, even if you forget that your loan payment is due on the 15th one month. Freeing yourself from this added worry is how to prepare your mind for the last step.

Live Rich Now

This last step is my favorite. Every day is important, both today and the days 40 years from now. They should be treated as such. I don’t want to spend so much that I forego the days 40 years from now, but I don’t want to scrimp so much that I ruin today either.

Finding the balance (and the wiggle room in your budget) to live well today and 40 years from now is how each of us will build the lives we truly want to live.

It Was Never About the Coffee

All that the Latte Factor really means is, stop spending money on the little things that you don’t move you towards where you really want. It’s not about sacrificing your morning coffee so that you can save an extra $1,000/year. It’s about ceasing the mindless spending in order to put that $1,000/year towards something that will give you happiness that lasts a lifetime. Just spend money on your priorities and see how you can spend less or cut out the rest.

Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.

James W. Frick

What are your thoughts on the Latte Factor (both the concept and the book)? Let me know in your comments below!

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