The Latte Factor

Confronted by the late start of my fianancial awareness, I got to wondering if there really was anything I could have done as a student that would have actually made a difference. After all, as a student it is very hard to save, right ? When you live your life paycheck to paycheck, there really is no way you can save anything substantial, right ? WRONG. If you dont believe me, read this article about the "Latte Factor". It just might make a believer out of you.

The basic premise of the author is simple to understand and something we all have heard a million times over - little drops of water make a mighty ocean. What is interesting about this article, however, is that the author shows with a simple example that by just saving $5 a day, you really can become a millionaire. You dont have to have a huge income to be able to make a million. As a matter of fact, you dont even have to go through much hardship. All you have to do is identify one of your luxuries or habits , and replace it with something a little less expensive. In the author's example, he just replaces the daily Muffin and Latte from starbucks, with some toast and home-brewed cup of joe. And voila, you will become a millionaire.

Well not quite. I should rephrase it to say, "voila, with some planning you will eventually become a millionaire". The assumptions made by the author are that you will invest the $5-a-day in ventures that return a steady 10% interest rate on your investements and you leave the money alone for about 42 years. I'm not sure as a student I would have wanted to open a brokerage account or invest in anything that is associated with a "risk factor". Without that, a more realistic rate of return is around ~5% that CDs and online banking accounts give (link). So lets say I diverted $35 per week to an online account yeilding 5% and kept doing so for around 30 years. Punching in these numbers in the latte factor calulator , I see I will have around $127K. Not too shabby. By just skipping a latte everyday, I could easily retire a year earlier. Or upgrade my retirement villa to the "lakefront" retirement villa. Or (fill in your day dream here :).

Of course, when you start working you can save more and really get to that million. And, hopefully in a lot less than 30 years. For now though, lets make a start. Look at your typical day (or a week or a month). How much can you divert towards your savings, without severly cramping your lifestyle ? Be realistic. If you get all excited and pledge to save too much, after a few days of scrounging, you may get frustrated and give up. So work out a realistic number and use the direct deposit feature to divert that amount automatically to an account other than the one you normally use.

Here are some questions that may help you determine your "latte factor"
* If you smoke, can you reduce the number of packs per day/week/month ?
* If you like pub-hopping, or eating dinner out, can you reduce the number of times you go out ?
* If you eat lunch out, can you pack lunch instead, atleast for some of the days ?
* If you watch a lot of movies in the theatre, can you watch some on dvd instead ? Or go for the matine show which costs lesser ?
* If you are a shopaholic, can you shop ONLY on the super-duper sale days ? Or designate only one day of the week as your shopping day ? AND then determine to strictly "window-shop" every other time ?
* Can you replace some of the brand items in your grocery list with generic store brands ?
* Can your share your apartment or car-pool ?

For a lot more ideas, please take a look at the comprehensive list on "Tips for Frugal Living" (link).

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