Would you give up a latte a day to become a millionaire?
David Bach, a personal finance expert and author of “The Latte Factor: Why You Don’t Have to Be Rich to Live Rich” recently broke down three principles that he believes will lead financial freedom.
To start, pay yourself first. In an interview on Yahoo Finance’s “YFi PM” Bach said taking one hour of your daily income—and putting it aside for yourself — is “the secret formula to becoming a millionaire.”
“The Latte Factor” follows the story of Zoey Daniels — a fictional twenty-something professional working in New York City that struggles with her finances. Daniels faces a growing burden of student loans and credit card debt.
That being said, Bach has a solution that could really pay off for millennials like Zoey. “If she gives up her latte, or she makes her lunch and doesn’t eat out everyday or she skips having one drink after work,” Bach said. “If she took that $10 a day, she could become a multi-millionaire.”
Bach’s story— which echoed other prominent experts warning about the perils of frivolous spending — may be fictional, but it represents a real-life struggle that many millennials encounter when it comes to their finances.
Only 24% of that age cohort demonstrate basic financial literacy, according to a study from the National Endowment for Financial Education.
According to data from the New York Federal Reserve, millennials racked up over $1 trillion of debt, a 22% increase over the last five years –– more than any other generation in history.
Despite all these factors, Bach believes people, especially millennials, can benefit from putting their money into two different buckets: the future (retirement) and what he calls as a “dream account.”
“When you’re in your 20’s or 30’s, you can’t even visual yourself at 60. But if I asked you something you want to do right now, or in the next 12 months that takes money, you’ve got something,” he added.
Putting money aside automatically for those dreams starts with your own paycheck, according to Bach. “Whatever you earn [at work] in an hour, you keep the first hour a day of your income,” Bach said.
“That’s 12.5% of your gross income. The average person goes to work and if they have a 401k plan, and if they use it, they’re only saving 3% to 6%, which is half of what they need to save.”Bach added.
Sarah Smith is a Segment Producer/Booker at Yahoo Finance. Follow her on Twitter: @sarahasmith