Updated on 05.06.07

Don’t Sweat The Small Stuff: Another Way To Find Room In Your Budget For Retirement Or Other Savings

Trent Hamm

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.

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  1. Both approaches are valid in some situations.

    If you are blowing large amounts of cash on big ticket items, that’s where you can have a big impact on your budget. So it would be stupid to focus on the “latte factor” in that situation. (Although just spending an extra $10 a day on coffee and a donut has a similar effect spending $350 a month more for a more expensive car lease).

    However, if your big ticket items (transport, food, housing etc) are already cut back to the bone, then you do have to look for any other small “luxury” items to cut out in order to be able to save any extra for retirement.

    As with most “rules” of personal finance, it all depends on your own situation, and there is no “one size fits all” formula that can be applied.


  2. Missy says:

    I have been tracing all expenses. I have found this helpful in that I actually KNOW where the money is going. I have had to make adjustments to the categories in my budget because I underestimated the actual amount I spent.

    The budget is not something that will work in just one month. It takes time and correction. I just have to accept the small failures as lessons learned.

  3. Debbie says:

    I really like this idea of ordering your expenditures by cost per month so you can better compare expenditures of rare expensive buys and multiple less expensive buys.

    One interesting thing about your example is that it appears that before you talked to her, your friend did not realize that there was another viable option. So if she had done your exercise, she may have thought to herself, “There is no way to eliminate or severely reduce this expense without a major change to my life because I need to drive and because having to drive an economy car would change my life in a bad way.”

    Looking at your expenses in order is a good first step, but magically noticing a cheaper option that you have never yet noticed during your entire life seems unlikely.

    Maybe some more good advice would be to look at the top few things on one’s list, write down all the reasons why you can’t reduce this expense, and then think of ways to research whether these reasons are actually true.

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