Thursday, February 08, 2007

Latte factor necessary or fake?

Okay in his recent money magazine article Walter Updegrave writes about not giving up lattes but instead focusing saving on the big ticket itemes. The summary of his article is that you can save $400k easily by doing three things. One, drive cheaper cars, for example a new $21k Honda Accord instead of $30k Acura RL. The lifetime savings will be $180k. Two, send your child to a public university instead of a private university, lifetime savings $164k. And finally save $1k each year on your vacation. The lifetime savings is $122k. All of this will add up to an easy $400k saved over your lifetime.

Do I buy this or do I think it's easier to stop buying coffee everyday? Truth is I think carefully thinking over big purchases more important. Yes it's important not to waste money and perhaps buy less fancy coffee. But that coffee can be paid for in cash if you aren't "house" poor or "Car" poor.

In today's world it seems like people are more very expensive homes and having trouble affording them. This drives the use of CC and HELOC, etc. So how to curb this? Not buy cutting out daily lattes $5 x 365 = $1825/year. Yeah that's not enough. What would really help someone annually is not having a mortgage that is 36% of gross but rather 28%. Or not having a car payment of $500/month. Those items would save THOUSANDS of dollars a year not just $2k at most.

I understand that tracking your money is important. And foolish spending isn't helping the problem. But if a lot of people are already running towards the red with just a house payment and car payment, then tracking every penny doesn't matter if there isn't enough income to cover even bare bones expenses.

What do you think? Is it the latte factor or the overconsumption of expensive big ticket items?


Lazy Man and Money said...

I thinking it's probably equal parts of both. I really don't think too many people's coffee habits are $5 a day. At least the coffee places my fiancee goes to (Starbucks), top out at around $2.60 or so. Suddenly it's closer to $1000 a year.

Interesting thing about the car example is that over the life of the car, say 10 years, it's about the same as the coffee example. The RL is $9K more than the Accord so that's under $1000 a year. The coffee could save you even more.

In the end, you need to do calculations of what you are buying and how often you buying it. Tons of small things can add up to one or two big things. Best to pay attention to both.

Living Almost Large said...

Lazy Man, normally I'd agree with you but two points.

One people don't usually only buy a coffee, sometimes a bagel, sometimes a muffin, and usually not just coffe. Usually people get expressos, caps, lattes or fancier drinks. So I think $5/day in spending is easily done.

Second, sure it's $9k over the life of the car, but do people really keep their cars 10 years? Or do they trade them in every 3-5 years and get a new car? More likely than not, and everyone on a lease trades in every 3 years, so that $9k isn't over 10 years, more likely 3 years. And it adds up fast if it's couple doing it every few years.

I definitely agree people should track small things. But it's a lot easier to tell someone stop leasing a car every 3 years instead of stop drinking starbucks.

Anonymous said...

If you're buying a new car and then giving it up after 3 years, then it doesn't matter which car you buy, you're wasting money.

(My fiancee bought a new car last May. We'll be driving it until it dies...or at least until it starts incurring a significant number of expensive repair needs. I'm probably going to buy a new-or-nearly-so car later this year, and trade in the car I bought used 3 years ago, which seems to be entering that diminishing-returns phase.)

Cutting out any expense you won't miss is, of course, always a good idea. But I'm rather tired of hearing would-be PF gurus lecturing other people on what they should give up because of course they won't miss it. If I drank coffee, I'd probably be very reluctant to stop, just to save the cost of it. And I'd sooner drink drain cleaner than the stuff that comes out of office coffee machines.

If someone is going to have to make a major lifestyle sacrifice, they're going to resist and rebel unless they get something back for it that they perceive as having equal or greater value. An extra thousand dollars a year in retirement savings wouldn't qualify by that standard for almost anybody.

Everything has a price. Including savings. And sometimes, the price is too high.

Living Almost Large said...

Hey I'm not saying giving up drinking coffee. I actually think it's easier to give up buying too much house, a cheaper car, and public instead of private school.

But it's a lot easier to stop buying cars every 3 years than it is to stop drinking coffee.

And why do you suppose you are judging PF bloggers so harshly? I mean I'm not saying not buy a new car, I'm commenting on buying a cheaper car. And I've bought a new car and kept it already 8 years. Who knows how long it wil last or if I will buy new again or used.

I'm really not sure and not going to make a comment I may regret later. I think it'll depend on the circumstances under which I purchase my next car before I make a decision.

Rash impulsive judgements seems to be the tone of many people. Assuming that those who preach financial sanity are frugal. Or are in debt. There doesn't seem to be room for commenting...

But thanks for posting, at least someone is reading.

Elisabet said...

The "latte factor" is a factor for someone like myself who is in dire need of getting out of debt to the tune of $40k. It's not so much a factor for the person who is debt free. In that case, you just budget it in. It's your money. You can spend it how you see fit. Lattes are ok if you're paying cash for them. Just make room in the budget for it.

I think it becomes an issue when you have someone who is in debt, but refuses to make the changes necessary to get out of debt. The latte factor will help with that. Also you have people who think they can't afford to save money. The latte factor enters in there too.

So I guess it just depends on the person and their situation.

You're right on the big purchases though. Those can make you or break you. Debt to me though is always unacceptable whether it be the Acura for $40k or the Accord for $31. Better to drive a beater for awhile and save your car payment and then pay cash eventually for the nice, nice car.

All that is easy to say on this side of the debt line. Now that I've so royally screwed myself up. :)

Drastic times...

By the way! I'm reading your blog too. :)