David Bach, author of the Automatic Millionaire series, coined the term “Latte Factor” to capture the idea that small changes to the way you spend your money can lead to big results over the long run.
The concept is simple. Many of us make regular, habitual purchases, be it eating out for lunch everyday or buying a $5 latte at the local Starbucks every morning. By avoiding or reducing this purchase and saving that money, most people can realize substantial savings overtime and achieve many of their financial goals as a result including early retirement.
Being Canadian, I’ll use “The Timmie’s Factor” – because it’s probably more directly relevant to life north of the 49th parallel. We do love our Tim Horton’s coffee after all.
So is there merit to this concept? Well, let’s find out. Imagine you pick up a large double-double and a muffin every day on your way to work. For simplicity sake, let’s say that costs you an even $4. That’s not too much to pay for that tasty way to start the day? I mean what’s $4 right?
Well, $4 a day each weekday works out to $20 a week ($4 x 5 days). In a typical month that’s $80 ($20 x 4 weeks), or $960 a year ($80 x 12 months). Now we’re talking about some serious coin. For $960, you can usually find a good deal on a travel website and spend a week in a tropical paradise.
Let’s say that instead of a week on the beach every year, you invest that money. So each month you dutifully take your Timmie’s Factor money and you put it into an investment vehicle that you and your financial advisor agree is right for you, be it a Guranteed Investment Certificate (GIC), bonds, mutual funds, exchange traded funds (ETFs) or stocks. And let’s say you started when you were 35 and you did this until you retired at the traditional age of 65.
The table below shows what you would have depending on the average rate of return you earned on your investments.
The results are even more dramatic if you started ten years earlier at 25.
Right about now you’re thinking – WHY DIDN’T ANYONE TELL ME THIS IN HIGH SCHOOL?! Well they did, only they called it “compound interest” and they buried in some boring math class. Had you known, you’d likely have started saving with your first job.
Believe me, you don’t want to see the results of starting at 18, it’s enough to make you take a sick day. If you are a glutton for punishment and you want find out what starting at 18 would be like…or if you’d like to figure out what your own Timmie’s Factor could be worth, visit the Assiniboine Credit Union Savings Calculator and do the calculation yourself.
So the point is – small, regular savings can add up to substantial sums of money over the long run. The Timmie’s Factor is really just a metaphor representing any regular purchases that you make out of habit that you won’t miss terribly if you stop or replaced it with a less expensive alternative. For example: going out for lunch every day or paying for the premium cable channels every month even though you rarely watch them.
You don’t even have to cut these things out all together. You could simply reduce your spending. For example, you might stop by the Tim Horton’s only on Fridays as a reward for making coffee at home all week. Most of us can find the equivalent of three to five dollars a day in our spending habits that we can substitute or eliminate.
If it meant retiring five years earlier or taking a hot-spot vacation every year, what spending habit would you be willing to change? What is your Timmie’s Factor?