You must have all heard of the Latte Factor®. It was coined by author David Bach. It says if you save $4 a day by skipping a [Starbucks?] latte, and you invest it, you will have a lot of money when you retire.
This inspired automatic savings programs such as Bank of America’s Keep the Change®. It rounds up your purchases on your Bank of America debit card to the whole dollar and then it puts the difference into a Bank of America savings account.
Cynics say it’s just a way to encourage you to use the Bank of America debit card and savings account. Using the debit card earns Bank of America a swipe fee from the merchant. Bank of America’s savings account pays nearly nothing.
A more recent variation is the Acorns mobile app. It watches your debit card and credit card transactions and it calculates your virtual spare change. Whenever you accumulate $5 worth of virtual spare change, it moves $5 from your bank account and invests it in a handful of ETFs.
I don’t think these gimmicks really achieve much. Teaching kids, maybe. Adults for real, no.
Just for kicks I looked at the transactions on our debit cards and credit cards in the most recent month. If we had used the Acorns app, it would’ve moved $20 from our bank account into ETFs.
The $1 per month fee from the Acorns app would serve as a 5% load right there. Forget about the fee for the moment — let’s say they make it zero — does investing $20 a month really help? If we wanted to invest $20 a month, can’t we just schedule it ourselves directly with a mutual fund company without tying it to a mobile app and how many transactions we make on debit cards and credit cards?
I think these roundup programs have the opposite effect of what they purport to achieve. People feel guilty of not saving or investing. The roundup program lets them check it off the list easily. “Look at how good I am. I invested $20 this month into 6 ETFs. I’m diversified.” Sure, everything has to start somewhere, but let’s not kid ourselves how much investing $20 a month will really do.
I like the opposite, the reverse latte factor, if you will. Save money on large items but reward yourself with small luxuries every day. I did it recently with latte, or to be exact, coffee beans for making latte.
Peet’s Coffee is a popular brand here in California. It was a sister company of Starbucks before now Starbucks CEO Howard Schultz bought out Starbucks and made it the Starbucks as we know it today. In addition to selling coffee drinks, Peet’s also sells freshly roasted beans in bulk. You can buy as little as half a pound.
Coffee beans bought from grocery stores were roasted 30-60 days ago. Beans you buy from a Peet’s Coffee store (or peets.com) were roasted yesterday or within a week. Possibly due to placebo effect, I like latte made with freshly roasted beans better. The added cost over beans bought from the grocery store? About 4 cents per cup.
I didn’t bother with double-blind tests. Whether freshly roasted beans are truly better or not, spending the small extra amount of money lets me enjoy a small luxury every day. It’s a very cost-effective reward.
Is this the feared lifestyle inflation? It is, and it’s good and intentional. People say money is better spent on experience, right? Sipping latte made with freshly roasted beans every day is an experience.
I believe financial success is not achieved by nickeling and diming. Don’t waste your precious willpower on trying to save a small amount each and every day. You will wear yourself out. Save the energy on things you do once but benefit forever, such as kicking up the 401k contribution to the maximum or moving your investments from a high-cost place to a low-cost place. Then you can make latte with freshly roasted beans all year long.
Do you agree or disagree? Do you think frugality on every little thing day in and day out is actually the key to financial success?
[Photo credit: Flickr user Elsie Hui]