While I was reviewing David Bach’s book The Automatic Millionaire this week, I noted that he made continuous reference to “the latte factor,” which basically states that you can come up with the money for retirement by cutting small items out of your budget, such as the nominal latte.
While that makes a lot of sense in theory, many people have a very difficult time giving up these day-to-day luxuries, and after a few weeks of avoiding small pleasures, they fall back on their old routines because they’re comfortable. Let’s face it, a person’s comfort zone is very important to them, and things that interfere with that comfort zone are often the most challenging to overcome.
So how can you find money to save for retirement if you’re having trouble giving up the little things? Go for the big things instead.
Give this little exercise a shot: make a list of every single one of your monthly expenses, along with the approximate cost. You should also include any expenses that don’t come every month – try to estimate the cost. Think you’ve got them all? Did you include your entertainment expenses, your shopping expenses, and so forth? Once you’ve got that list, order them by their monthly cost, with the most expensive one at the top.
Now, start at the top of the list and for each item, ask yourself if there is a way to eliminate that expense or severely reduce that expense without a major change to your life. If you honestly can’t do anything to reduce that item, then move on to the next one, but don’t just close the door on that item because it’s “essential.”
Here’s an example of what I’m talking about. A friend of mine was spending about $550 a month leasing a very expensive automobile. When I asked her why she was spending so much to lease a car, she said it was because she “needed a car to drive.” But when I showed her that she could buy a very nice car for about a third of that per month without sinking into the “economy car” category (which she did not want), she seemed somewhat more interested.
Here’s where I got her, though. If she took that extra $350 a month and put it into an investment that earned 9% annually, in 30 years she would have $654,129. If she managed to get a better investment than that (which is possible, considering the Vanguard 500 has averaged over 12% annual since its inception in 1976), she could have over a million dollars for her retirement.
I asked her whether or not driving a Lexus back and forth to work instead of a Mercury Sable was worth a million dollars in retirement savings. Care to guess what her answer was?
If you’re having a hard time finding space in your budget for saving for a retirement, it might be a worthwhile strategy to look at the big things instead of sweating the small stuff.