3702: The Latte Factor: 8 Ways We Often Overspend by Lama Farran with Becoming Minimalist on Intentional Spending

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  This is Optimal Finance Daily. The Latte Factor: Eight Ways We Often Overspend by Lama Farren with becomingminimalist.com. I'm your narrator Justin Malik, reading you articles or essays every single day of the year, including holidays, and helps keep us both on the right track. So with that, let's stay on that track as we optimize your life.

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  The Latte Factor: Eight Ways We Often Overspend by Lama Farren with becomingminimalist.com. Maybe the biggest misconception about building wealth is that it is a function of our income. In reality, it is much more a function of our spending habits. But most people are simply unaware of how much money they spend. Not so much in the large purchases, but in the small things we spend money on every day. David Bach, a financial author, assigns a memorable phrase to this phenomenon. He describes the small amounts we spend here and there as "the latte factor." It comes from the notion that if we added up the cost of our daily lattes and saved

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  it or invested it, we could build up wealth significantly faster. As a certified money coach, I encourage my clients to build up a rainy day fund for events they could not have planned for: a car accident, a water leak, or even a sudden job loss. The most common objection I hear is, "Where will I find the money to save for this emergency fund?" I always introduce them to "the latte factor." I challenge them to track every expenditure for one month. I can almost guarantee that those who complete the challenge will be surprised to discover where their money has been disappearing to. I've used this tracking experiment with hundreds of people from all different socioeconomic backgrounds.

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  Here are the eight most common money leaks I have witnessed. Number one: Eating out. Americans go out for lunch on average twice a week and eat 18.2 meals per month outside the home. This averages to spending $232 each month eating meals prepared outside the home. At first glance, this may sound high. Surely, we don't spend as much as the average, but we tend to disregard how quickly it adds up: quick lunches at the office cafeteria, business lunches with associates, little snacks from the vending machine, a bag of chips before we hop on the train, pizza takeout

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  on the way home, a weekend date, or a night out with friends. We never make all these purchases in the same day, but over the course of 30 days, they definitely begin to add up. Number two: Coffee. There's no question that coffee plays an important role in workplaces across the United States. Even the latte factor draws its name from the beverage. But rarely do we realize how much money we actually spend on it. The average American spends almost $15 a week on coffee, or $1,100 annually. This may seem like a significant amount of money to some, or not much to others, but

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  either way, it is money that could be directed toward paying down credit card debt, a student loan, or a burdensome car payment. Number three: Books and magazines. Reading is important. I encourage people to do more of it. But if you are a prolific, or even regular, reader, you may not realize how much of your money is being spent on books and magazines. Book purchases are often small in nature, but if consistent, they add up. Frequently, readers who complete this tracking exercise are surprised how much of their income is spent there. We are fortunate to live in a country where almost all communities have their own public libraries.

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  Why not use them as much as possible? Another solution is to find a group of friends or family who regularly exchange and borrow books with one another. Number four: Unused utility services. Paying our utility bills blindly often leads to overpaying for services. Are you watching all the cable channels you are currently paying for? When was the last time you used the three-way calling or the "call forwarding" options on your home phone? Taking a few minutes to review your bills and asking yourself if you really need these services could save you money every single month. Call your service provider and ask what specials they currently have, or what they can do to help decrease your bill.

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  You may be pleasantly surprised how much a 10-minute phone call will save you. Number five: Extra banking fees. When we don't take the time to review our monthly bank statements, we often fall into the trap of blindly paying banking fees we could easily avoid, especially if you swipe your debit card more than your plan covers. Overdraft fees are another way your bank account gets hit, or withdrawing cash from an ATM that is not associated with your bank. You can quickly rack up $20 or more of additional fees each month if your banking plan is not the right fit, or if you consistently avoid walking one more block to withdraw money from your own bank's ATM.

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  Take the time to review your bank statement each month, looking for inconsistencies. When you do, make a special note of "bank charge" line items. Number six: iTunes. These days, most of us own a smartphone where our credit card is automatically linked to an online store. As might be expected, this arrangement makes it easy for us to press the "buy it now" button. One day, it's a cool ringtone that you really, really want. The next day, it's a newly released single from your favorite artist. The day after, it's a new app that seems so useful or entertaining. And the cost is not just financial.

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  While smartphone users spend $25 billion on mobile apps, we also spend over two hours every day using them. Number seven: Lottery tickets. When we are struggling financially, buying a lottery ticket becomes our glimpse of hope. For a few moments, when we are checking the numbers, we feel as if our life worries will suddenly vanish and our dream of living a debt-free life will finally come true. Through this small ticket, we see the light at the end of the tunnel. But the truth is, it is simply an illusion. Hopes of a better life cannot be bought with $2 or $5. It's something you consciously work towards every day.

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  And number eight: Amazon purchases. I spoke recently with a friend who ran his Amazon account history and was shocked to discover he had spent $11,000 over the past four years on Amazon. He noted that his history included "one large purchase" over $1,000, a new laptop, and a few more items over $500. But the vast majority of his total bill had been spent purchasing items in the $10 to $20 range. These online purchases seem small and insignificant individually, but over time, these impulse buys added up to a very significant number, the very definition of "the latte factor."

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  Some of these areas are certainly more relevant to you than others. They merely represent the eight most common money leaks I've witnessed. The most effective way to discover our specific latte factor is to track your spending. Try for one month, but three months is even better. It'll then be much easier to pinpoint your weak areas and adjust your spending accordingly. Paying attention to the small money leaks, while they are still leaks, will prevent them from becoming floods. More importantly, it will allow you to build your safety cushion to fall on when life happens.

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  You just listened to the post titled "The Latte Factor: Eight Ways We Often Overspend" by Lama Farren with becomingminimalist.com. I'll be right back with my commentary. I remember how frustrating it felt to make payments toward debt without knowing when I'd finally be done. Even when you're making progress, it's hard to stay motivated if you can't see the finish line. That's what I like about the approach behind today's sponsor, Monarch. Its debt paydown simulator takes your actual balances and payments and turns them into a clear timeline, including your projected debt-free date. You can try different payment amounts side by side and see how much sooner you could reach that goal. And that visibility matters.

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  Thank you to Lama. I've got a bit of a love-hate relationship with the latte factor. The core idea that small daily spending adds up is definitely true, but I think it gets used in a kind of shaming way sometimes. Like, if you just give up your $5 coffee, you'd be rich. And that's not really fair, because for a lot of people, the big stuff— the rent, the car payment, the insurance, and so on—makes way more of a difference than a daily coffee. You can't reduce dollars and turn that into tens of thousands. So I don't love it as a guilt trip, but I think it's useful when talking about awareness.

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  When you actually track where your money goes for a month, the point isn't to feel bad, it's that you finally see it. And once you can see it, you get to make an actual choice. Feel free to keep the daily coffee because you truly love it, or maybe because you experience it with someone else and really cherish that. Instead, cut something you won't even miss, because there's likely something you didn't notice once you start tracking. Personally, I believe in spending on what you care about on purpose, instead of leaking money on autopilot. So if you try her one-month tracking challenge, don't do it to punish yourself.

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  Do it to find out what you actually value. But that should do it for today. Thank you for being here every day and optimizing your life along with me. It means a lot. Have a great rest of your day, and I'll see you tomorrow as usual, where your optimal life awaits.