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. [Read more…]