Is skipping lattes the road to riches...

On the finance forum of a message board I frequent, someone posted a review/summary of the book The Automatic Millionaire. There were several pages of good discussion about it, but one of the things that got debated the most was the "latte factor".

If you've read any articles or books on personal finance, the latte factor is a common argument. The idea is that people often have spending habits where they spend small amounts of money on items each day that, when added up, are a significant amount of money - like buying a $3 latte every day.

The discussion was torn between two camps - the "well, forget saving money, just get off your ass and get a better job so you can buy as much overpriced coffee as you want" and people who saw saving small amounts of money as a good idea. I fall into the latter.

Now, if you are putting away a ton of money in savings and retirement funds, are debt-free, and don't have any financial goals that you can't meet, then there is no need for you to go digging for little things to cut back on. But most people don't fall into those catagories - they wouldn't mind having a little more money.

And let's face it, there are two ways to have more money in your budget - earn more or spend less. And I guess most people can earn more long term - but not everyone wants to do what it takes to increase their income. Maybe they enjoy what they do or the people they work with. Maybe they have a job that they really enjoy or find really rewarding, but isn't very financially lucrative. Maybe they have a hobby or family that they enjoy spending time with, so they are willing to give up income so they can spend more time with their kids or their model airplanes.

The point is that cutting spending, while not likely to make anyone rich, is a good way to have a few extra bucks in the bank at the end of the day.

So where does mad anthony fall into this? Well, I don't buy lattes, or purchase prebrewed coffee on a regular basis. I have a Cuisnart grind and brew programable coffeemaker, so I load it with decent beans the night before - usually Starbucks or Trader Joe's - and take a steaming mug of homebrew with me for the ride to work. I like Starbucks coffee, but I can't justify the cost - or taking the time to stop. I also have been taking my lunch to work. This is a hard one for me - lunches are a big social thing where I work, and I kind of feel like a loser sitting at my desk eating my turkey sandwich. But I ran the numbers one time, and came up with something like a $1200 savings every year if I brought my lunch rather than eating in the employees-only all-you-can-eat buffet at work - plus it's healthier, and I'm trying to keep my weight in order.

If there is some small expense that you enjoy, that's your reason to live, then you probably should keep it - and if you need to, find something else to cut. The thing about budgets is that you can't have everything, and often you need to cut one thing if you want something else. The trick is to figure out which things are most important and spend money on those things. People have a tendency to spend a lot of money a little bit at a time without really thinking about if that's really the best use for their money, and the latte factor is a good way to rethink your priorities. And for many people, even when your income increases, your spending increases to match it - so my BMW-driving boss still keeps hoping to win the lottery.

The you-can't-have-everything thing works on bigger things too - it's the reason economists love cost-benefit analysis. Many economists don't think the government should put a bunch of money into stopping global warming - not because they don't think it's real, or a threat, or that it might kill some people. However, the money spent on stopping global warming could be better spent on things like prenatal care and clean water for people in Africa, and could save millions of lives instead of dozens. It's the reverse of the latte factor - spend a small amount of money on small things, and save a lot of lives.