Sunday, May 11, 2008

Latte Factor vs. Big Picture

I think most people have heard or read about the latte factor from David Bach's book the Automatic Millionare. Bach's plan is that by finding $5 a day (the cost of a latte) in your budget and directing that money into a retirement fund after 40 years you will find $1,000,000 in the bank.

Lots of experts also advise using the latte factor to pay down debt, instead of taking that $5-$10 a day and investing it you put it towards paying off your credit card debt or car loan. I'm generally in favor of this plan, I think its pretty easy to cut back on the day to day 'extras' and put that money towards your debt snowball. Once you start tracking your spending you will likely find lots of money leaks that you don't even realize are draining your wallet. (Here is a handy latte calculator.)

Walter Updegrave, Money Magazine's Senior Editor, advises that its better to stop "obsessing over every little treat" and focus on the bigger expenses in life. If you have a $500 a month car payment you would do better to cut out the car payment than you would if you cut out the latte.

I think Mr. Updegrave's advise is very smart but hard to implement mid-stream. If you already have a $500 a month car payment, it is difficult (and probably expensive) to get rid of the car payment. On the other hand, if you don't have a monthly car payment do your best to avoid taking one on.

What do you think?

No comments: