It's Monday morning and you're running late for work ... again.
So, what do you do? You hop in the car and race to your favorite coffee shop drive-thru and quickly order a double mocha with three Splendas, as always. It's only $4.93, so who cares? After all, that's merely chump change in the grand scheme of things and a small price to pay for one of your few indulgences.
But is it?
Several years ago, author David Bach shed light on this kind of daily purchase by coining the term "the latte factor." According to Bach's website, the latte factor is a concept aimed at getting people to take a closer look at how their daily purchases impact their bottom line. The general idea is that, instead of wasting small amounts of money on "little purchases such as lattes, bottled water, fast food, magazines and so on," Bach says, people could instead use that money to pay off debt, save for the future and accomplish other goals. But, do those small amounts really add up?
In order to illustrate what your spending habits can cost you over the long haul, let's get back to that daily coffee run.
If you were to spend $4.93 on your coffee each weekday, your weekly coffee spending climbs to $24.65. That doesn't sound so bad. Now imagine that your coffee habit extends the length of an entire year, minus the two weeks you're on vacation of course. Splurging on that decadent drink 50 weeks out of the year will set you back $1,232.50. Ouch.
Let's take it even further and say that you stop for coffee on your way to work for five years. Your daily coffee run has now exploded in cost to $6,162.50 in total. What could you do with all of that money?
It Doesn't Stop There
But coffee, magazines and snacks aren't the only purchases chipping away at family budgets. Everything you spend money on has the potential to impact your long-term financial health. Everything. Your house. Your car. Even your monthly satellite bill could mean the difference between having extra money and living paycheck to paycheck, or going on that annual vacation or staying home. A few examples:
-- Getting a $60 monthly manicure and pedicure will cost $720 over 12 months and $3,600 over five years.
-- A monthly cable television bill of $86 will cost $5,160 over the course of five years.
-- The $120 you pay for your family's smartphone bill will cost $7,200 over the course of five years, and $14,400 over a 10-year period.
The "latte factor" also becomes relevant when applied to one of the biggest culprits of family spending problems -- your food bill. Between buying healthy groceries for your family and the occasional dinner out, it's easy for food costs to get out of hand. An example:
-- A family who spends $45 at restaurants twice per week will spend $4,680 annually for the privilege.
-- That same family will spend $23,400 on eating out over the course of five years, and $46,800 over the course of 10 years.
Suddenly those restaurant dinners don't seem quite so appetizing, do they?
Uncovering Your Dirty Little Secrets
When it comes to saving money, all habits matter -- even the small ones. And that $5 coffee run, monthly manicure or weekly golf game can wreak havoc on your family's financial health without you even noticing. But it doesn't have to be that way. If you're not saving as much as you want and believe you could do better, these simply steps can help:
1. Take a walk down memory lane.
In order to see where your money is really going, you need to take a closer look at your own spending habits. Start by breaking out last month's bank statements and credit card bills and doing some detective work. Break each individual expense into categories that make sense, and tally them up. What you find may shock you.
2. Track your spending.
After you discover the ugly truth about your spending habits, try tracking your spending in real-time. Carry a notebook around, and write down every purchase while also taking the time to lump each one into categories that make sense.
3. Give your spending the ax.
Tracking your spending can be an eye-opening experience, simply because it exposes you to dirty little secrets you may not have known you had. Once you see where your money is truly going, it's time to decide what should get the old heave-ho. Your expenses are unique to your own situation, so only you can decide.
When you cut out some of the "extras," you'll have more money to spare. But instead of spending those funds elsewhere, create a meaningful plan to funnel them where they are needed most. For example, use your new funds to pay down debt, start an emergency fund or contribute to retirement.
Once you've made some positive changes, it's important to avoid falling back into the old habits. Now that you know the truth about your spending, you can no longer hide from it
Holly Johnson is the founder of personal finance website, Club Thrifty, which provides tips for frugal living, budgeting, and more. Holly also writes about frugality and travel at Get Rich Slowly, Frugal Travel Guy, and her other website, Travel Blue Book.
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