When looking at your financial situation at the end of a given period are you left questioning, “Where did all that extra money go…”? After all, you did the math, your income is more than your expenses, and you should have X amount leftover. There seems to be a layer of income that just “disappears” from our bank accounts when we look at our spending over time. Don’t worry, you’re not alone and there’s a name for this phenomenon: The Latte Factor™.
The idea is that the cost of a latte a day over a month, a year, or 10 years can add up to a large chunk of change. This effect isn’t solely reserved to lattes though. We seem to forget about small daily or weekly expenses when looking at where our money is going, but they do add up.
Now, we’re not saying you need to skip the drive-thru on the way to work. If your daily cup is important to you, then caffeinate up! We’re in the business of Financial Planning, Not Financial Telling after all. Only you can decide what is important to you when it comes to these smaller recurring purchases. With that said, what you don’t measure, you can’t manage.
A helpful, yet surprisingly simple, exercise we like to take our clients through looks like this:
- Start by looking at your net income on a monthly or annual basis.
- Jot down the fixed expenses you have that are going out the door no matter what.
- From there, move on to your variable expenses. These are things that you need, but change from period to period like groceries, fuel, clothing, etc.
- Subtract these expenses from your net income and see what’s leftover.
In theory, if you’re meeting your savings goals and financial objectives, that leftover money can continue to be spent. However, if you aren’t happy with your current level of savings or you have a new financial goal, measuring where this leftover money is going is the perfect place to start. Are there small expenses you can cut to help with these new goals?
Budgeting and tracking your spending can seem daunting, but when you need to “find” extra money it can be quite freeing to know exactly where your money is going and what you can do about it. This simple “money in, money out” exercise is a great place to start if The Latte Factor™ is giving you the jitters!
If you’re interested in learning more about The Latte Factor™, check out author David Bach’s website here.