Small leaks sink great ships: How little habits can have large consequences

Small leaks sink great ships: How little habits can have large consequences

If you've spent any amount of time reading money blogs over the past fifteen years, you've heard of the latte factor. In fact, you're probably sick of hearing about it.

This concept — put forth by David Bach in his best-selling The Automatic Millionaire — is based on the idea that daily spending on small things has a big impact on your future wealth.

“We don’t even realize how much we're actually spending on these little purchases,” Bach writes. “If we did think about it and change our habits just a little, we could actually change our destiny.”

The latte factor is nothing new. More than 200 years ago, Benjamin Franklin cautioned, “Beware of little expenses. A small leak will sink a great ship.” Jesus urged his disciples to not let anything go to waste. The stoic philosopher Seneca the Younger wrote, “With parsimony a little is sufficient. Without it nothing is sufficient. But frugality makes a poor man rich.”

Yes, the best way to spend less is to cut back on the big stuff. Yes, it's important to earn more money. But frugality is an important part of personal finance too.

Today, I want to share a real-life example of how small, daily habits can have a powerful effect on your ability to build a wealth snowball.

A Tale of Two Brothers

I've been back at the box factory for over two months now. It's been fun. (It's also been hindering my ability to work on Get Rich Slowly, but that's another story.)

One of the best parts about going back to work has been interacting with other people. Working from home is a lonely, lonely endeavor. I've enjoyed reconnecting with my brother and cousin and our company's employees.

The daily chit-chat has proved a rich source for future article ideas. As people talk about their daily lives, money is a frequent topic. Plus, we all observe what our co-workers are doing and how their choices affect their financial health.

Here's an example of how a seemingly innocuous choice is costing one of our workers a couple of thousand dollars per year.

  • To encourage employees to get to work on time, we use positive reinforcement at the box factory. If you clock in by your start time every day in a pay period, you get a $50 bonus. We run payroll semi-monthly, so this adds up to $100 per month or $1200 per year if you're on time every day.
  • Two of our employees — let's call them Joe and Gus — are brothers. They've both been with us for nearly twenty years. They're good guys. Right now, Joe and Gus live together in a house that's roughly twelve miles (and twenty minutes) from the shop.
  • Despite living together, Joe and Gus drive to work separately. Why? Because Joe likes to get his on-time bonus. He's always on time (and, in fact, often early). Gus, on the other hand, likes to sleep in. While his brother always clocks in by 7:00 (and frequently by 6:45), Gus usually doesn't show up until 7:05 or 7:10. He's getting an extra twenty minutes of sleep each morning.

On the surface, this isn't a big deal, right? Gus likes to sleep in, so he's willing to sacrifice $100 each month to do so. In reality, I think Gus is paying too much for a few minutes of sleep each day.

Let's crunch some numbers.

The High Cost of Sleep

Here's how much sleeping in actually costs Gus.

First, there's the on-time bonus itself. Because he's always a few minutes late for work, Gus is giving up $1200 per year. (In reality, Gus doesn't miss his on-time bonus every pay period. For the purposes of this example, however, let's pretend he never gets it.)

Less obvious is the cost of transportation.

There are approximately 250 work days every year (once you subtract for two weeks of vacation). Gus and Joe drive twelve miles each way to and from work. That's an annual total of 6000 miles commuting — 6000 duplicated miles, in this case.

Gus drives a paid-for 2004 Ford Focus, which means his driving costs aren't as bad as they could be. According to the American Automobile Association's 2018 Your Driving Costs brochure, the Ford Focus is a small sedan that costs approximately 15.26 cents per mile to operate. Ownership costs (insurance, licence, registration, etc.) run roughly $1781 per year. Assuming Gus drives 12,000 miles per year (which seems reasonable), then ownership costs are about 14.84 cents per mile. All told, driving costs Gus around 30 cents per mile.

Assuming that Gus commutes 6000 miles every year at 30 cents per mile, he spends $1800 annually to get to and from work. If Gus were to carpool with his brother each morning, he'd probably split the costs of driving. So, let's say his sleep habit costs him $900 in annual commuting costs.

Sleeping late costs Gus a minimum of $2100 per year. That's $8.40 per work day — or about 42 cents for every minute that he stays in bed.

To calculate the long-term cost of his sleep habit, I ran the numbers through this latte factor calculator. Assuming Gus gives up $5.75 per day (which is $2100 divided by 365 days in a year) and assuming he could have earned a 5% return on his money, then he's sacrificed $71,848.69 over twenty years.

Latte Factor Calculator

I'll admit that $2100 per year isn't big money. Maybe Gus feels it's worth sacrificing this much in order to sleep a little later each morning. If so — if this is a conscious decision — then great.

I'm willing to bet, however, that Gus hasn't actually considered what this costs him. I'm willing to bet that this is his latte factor.

Fighting the Latte Factor

I hope it's clear that the latte factor isn't really about coffee. And my analysis of Gus' sleep habits isn't really about sleep. When we talk about small choices like these, we're actually talking about opportunity costs and conscious spending.

I should also note that I'm not trying cast stones here. I'm the last person who should mock somebody for choices like this. In fact, my primary financial goal for 2019 is to plug all of the “small leaks” that have been sinking my own financial ship! But I think it's because of my own poor habits that I'm acutely aware of how the habits of others affect their financial future.

So, what are some ways to fight the latte factor — whatever that might mean to you and your life?

  • Be aware of what your choices cost. This means more than actual monetary costs. (After all, there's no actual cost to Gus for sleeping late, right?) It also means opportunity costs and the costs of lost time.
  • Figure out what's important to you. It's been a while since I mentioned the importance of having a personal mission statement. When you have a clear idea of where you want to go in life, it's easier to make decisions that help you reach that destination. If you don't have a clear destination, your decisions become somewhat arbitrary.
  • Make deliberate decisions. In life, there are often default options. If you don't consciously and deliberately choose something different, you get the default. Most people live their lives in default mode. They accept the default without question. Reject the defaults when they're at odds with who you are are want to become.
  • Practice conscious spending. Spend with purpose. The heart of frugality is choosing to spend on the things that are important to you while cutting back ruthlessly on the things that aren't. With conscious spending — or mindful spending, if you prefer — you evaluate every financial decision. You vote with your dollars.

Ultimately, my goal for myself — and for you — is to spend on the things that matter most in my life. By doing so, we're using money as a tool to build happy lives. When we fail to do so, it's as if we're mindlessly wielding money as a tool to casually chip away at our present and future well-being.

What we really want to do, I think, is to fund our happiness in the present while working to build a wealth snowball, a pile of cash that will allow us to live happy, golden years.

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Dave @ Accidental FIRE
Dave @ Accidental FIRE

Great analysis JD, love the numbers which always reveal truth. I see a lot of bloggers who poo-poo the latte factor and recommend saving on the big stuff only – housing, transportation, and food. I agree that you can get bigger savings quick by optimizing those three, and that’s a huge part of how I got to financial independence. But I also saved a ton of money on small stuff. Yes, foregoing $5 coffees was a part of it, but it extended well beyond that. It comes down to that simple advice “You can have anything you want but not… Read more »

Mysticaltyger
Mysticaltyger

That’s “pooh-pooh”. Poo poo is eh, something else.

S.G.
S.G.

Silly old bear.

Barb
Barb

I do understand your point. And this is somewhat nitpicking, but I think you are overstating the cost savings of carpooling. Unless Gus is getting rid of his car completely, his cost for insurance, licence, registration, etc. are going to be basically the same whether he car pools with his brother or drives himself. The cost saving is really limited to gas, parking fees (but I’m guessing you don’t charge your employees to park at the box factory, for a downtown worker that could be different), and possible a little less in maintenance (one less oil change needed per year?).… Read more »

Spencer for Hire
Spencer for Hire

And of course taxes on the bonus. Uncle Sam will get his as well when you run these numbers.

Eileen
Eileen

Self reflection — and then putting numbers to it, is a worthwhile exercise. I’ve been fortunate to work from home for the last 9 years (despite working for a very large corporate company with a local presence). This has allowed me to save on gas, wear & tear on my car and completely eliminates any latte (or lunches out) expenses. I should probably figure out how much that’s saved me as I approach 10 years! Despite working from home, I work a very predictable (and expected) 8-5pm so it’s not like my day is my own as far as leaving… Read more »

Anne
Anne

I was thinking the exact same thing. Why doesn’t Gus go to bed a bit earlier. Does he like the solitude of driving alone? Does he like that he can get away with being a bit late at his job on most days? Who knows?

Spencer for Hire
Spencer for Hire

Small leaks really do add up to a lot. The question I have is does focusing on leaks lead to a scarcity mindset? Are there ways of looking at things differently that create a different feeling? My wife and I have always looked at growing our incomes, but the creep of lifestyle inflation has been getting to us. We recently started focusing on what we could do to cut costs. Now that we focus on lower expenses I feel this sense of lack. It is really a weird feeling I would not have expected. There is nothing that I miss… Read more »

S.G.
S.G.

It isn’t scarcity as much as it is consciously setting your baseline. You aren’t trying to deny yourself lattes forever and ever, amen. You are trying to set your baseline at a place where a latte in the morning isn’t part of your ritual but it’s now a treat. If you are in the habit of the daily latte then at first it is deprivation. But if you pay attention you will start to notice what you really liked about lattes in the first place and stopped noticing when they were part of your daily routine. The easier way to… Read more »

Spencer for Hire
Spencer for Hire

I really agree with your second paragraph, don’t let them start in the first place. I have cut back on eating out at lunch and coffee breaks. We are also cooking more at home and changing our grocery shopping habits to reduce the grocery bill. I honestly do not feel deprived from any of these changes (no lunches out, coffee breaks, etc), but it is more of the mentality of looking at where I could cut costs and giving that my attention that is creating a negative feeling. When my attention was always focused on growth, cutting costs feels deflating.

S.G.
S.G.

But your savings are growing, right? I have a different attitude. Money that is spent is gone, but money that I don’t spend has infinite potential. I could spend it on ANYTHING. I spend my dragon’s hoard in my head over and over again. Because if I REALLY want something I can usually afford it. But things rarely measure up so I spend it again the next day (I’ve bought so many campers and pools in my head that I’ve lost count). Plus, when I deny something I want, especially at the grocery store, I feel all kinds of smug.… Read more »

Bill Koster
Bill Koster

Excellent article to motivate me to evaluate all those small habits that unconsciously lead to mindless spending. It’s not one or two small leaks that threaten to sink my financial future, it’s hundreds of small daily decisions that run out the clock on years where I could intentionally save a higher percentage and have more options and freedom in the future.

S.G.
S.G.

At the same time you can burn yourself out plugging holes instead of steering the ship. It’s a combination.

Pete
Pete

I have found that focusing on the small stuff sets my mind to save overall as well. For my wife and I it’s really about the mindset to not spend on stuff we don’t really value; from big ticket to tiny.

JanBo
JanBo

Forget Latte. Amazon? A thousand tiny holes….

S.G.
S.G.

There are leaky boats…then there are sieves.

Mike in NH
Mike in NH

JD, has your family found that the on-time bonus improved timeliness or that it actually had the opposite effect? I can’t remember where I read it unfortunately, but a while back I remember a study about how when day cares started charging parents fees for showing up late, it actually made the problem worse. The theory was that by having to pay the fee, it absolved the parents of the guilt of being late. Also, I know the Latte Factor isn’t about coffee, and I’m probably going to get pummeled for this…but at any point are we ever going to… Read more »

S.G.
S.G.

Depends on the fee. Mine is $1 per minute. It isn’t about guilt but $60 per hour.

FoxTesla
FoxTesla

I’m curious on this as well – is there data to show more workers are on-time with the bonus than before its implementation, or could the budget be used towards workers in a different way? Are there any negative effects for not being on time other than the lack of a bonus?

EM
EM

Here is the paper that talks about whether (or not) and when incentives work vs. penalties. https://rady.ucsd.edu/faculty/directory/gneezy/pub/docs/jep_published.pdf

CalLadyQED
CalLadyQED

You have to consider the tradeoff. What is he giving up, but what is he getting? He’s not getting just sleep. He’s getting the feeling of making his own decisions and sone (possibly much-needed) privacy and time away from his brother.

CalLadyQED
CalLadyQED

The control feeling might be a procrastination habit that he can work on. How can I feel in control and still make the overall best decisions. (Full disclosure: I recently read _The Now Habit_, so I’m applying those ideas to a lot of things)

DH
DH

I agree with this. I am guessing that he feels this is a relatively small price to pay for not commuting with the brother he both lives and works with.

JD, that doesn’t mean I don’t see the point of your post, I do. But everyone has at least several “sacred cows” and perhaps his sole commute is one of them.

DH
DH

Also, I’d LOVE to hear more about you working at the box factory, and I’m sure I’m not the only one LOL.

Are you working FT or PT? How are you reconciling this with the rest of your life?

Joe
Joe

Gus really likes sleeping in for a few minutes. He must be having a really hard time with the clock change.
Great observation about on-time people always being on time. They just need a little incentive to do better.
I’d like to hear more about your work at the box factory too. It sounds like a good fit. 2 days per week isn’t too bad.

Jason C
Jason C

Nice post. I like how you analyzed the latte factor from the inverse. For me it’s easier to see and count the cost of the daily latte purchase as I experience money changing hands (or banks exchanging electrons). Gus’ sleeping in is the same as you point out because he’s not actually spending money on the transaction. If he actually had to hand over $5 to someone in order to sleep in, that would be very noticeable. When it’s missing out on something (the bonus, which is very cool by the way), it’s easier to discount or ignore. Operating costs… Read more »

Robert McKee
Robert McKee

Thanks for the article. It’s really true that these seemingly insignificant habits really make a huge difference when their effects are magnified by time. Kind of like reverse compounding! These small decisions in our that we make over and over again in all aspects of life are what really shapes the lives we live.

Mariele Storm
Mariele Storm

This article pains me–if only I had gotten a $50 bonus for coming in on time! I was 5-10 minutes early most days at my part time job. $2100 over a year would more than pay off my credit cards. Ahh, such sadness. It only seems sensible to me to first cut out all the “big spending” areas, then go in one by one for the smaller things. Subscriptions are an obvious one. I can count on one hand my subscriptions–my phone bill ($55), my satellite ($54), my renter’s insurance (sure, it counts! $15), and my game subscription ($15). Aside… Read more »

Chris
Chris

The brothers story makes two faulty assumptions: 1) The only barrier to Gus carpooling with Joe is that Gus likes to sleep in. There is no evidence for that in the story. There may be things he likes to do after work that Joe doesn’t, or vice versa. Or maybe just alone time. 2) If Gus carpooled to work with Joe, he wouldn’t own a car at all. This is a really faulty assumption to make, especially in suburban/rural America. Just looking at the sleeping in, Gus is giving up $1200 per year. There are 251 working days in a… Read more »

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