Sunday, 6 July 2014

Why That Latte May Be More Expensive Than It Looks

  How much do you put aside each month?

  5% of your take-home pay? 10%? Or 20%?

  The first rule of the Automatic Millionaire is to Pay Yourself First, which seriously, does not mean enjoying the fruits of your labour by going on a shopping spree followed by a shiatsu massage, but saving money for your future.

  'But I can barely make ends meet today.'

  Well, how about you start telling me about your day....


  The concept of the Latte Factor, coined by David Bach in his book The Automatic Millionaire, is that if we take a careful look at our daily expenses, starting from the point we wake up in the morning, we can identify potential areas for savings such as, you guessed it, your daily latte...or pack of cigarettes, or bubble tea fix.

  To put it financially, this is how the Time Value of Money works a.k.a how much your latte money can actually be worth if you park it somewhere (that's not in your tummy) and it grows at a certain rate each year - in this case, the Straits Times Index (STI), grew at 8.83% on average each year. Hence, instead of spending $25,550 in 10 years, you get to keep it and get an additional $15,356

*Disclaimer: this is a simplified example which ignores rising costs and volatility in the STI
The Latte Factor - cost of latte
    I'm not saying that parking your coffee money in a fund is your safest bet since there are bound to be fluctuations in the short term but what the Latte Factor demonstrates is the potential of small savings.

  'But if I can't even enjoy my daily indulgence, why do I work so hard?'

  You're right, saving is not about scrimping the small stuff and being miserable. The purpose of this exercise is to demonstrate what small savings can do so you can imagine what will happen if you..


  Instead of beating yourself up over a cup of coffee, how about some money saving tips on how we can do this the simple, less painful way, yet with greater rewards?

  Start with your monthly bank/credit card statements and identify major transactions - housing, insurance, car, food, entertainment or shopping. 

  Do you really need to spend that amount you're spending? How about refinancing that loan? How much savings can a lower interest rate bring? How about car pooling? How much will that save you each month?

  Make a decision to save on large expenses and worry less about that single latte each day.

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