There Are Plenty of Skeptics and "Non-Believers" in Frugality
You might be one of them. I can hear it now---"how does saving $4 a day on my latte make me a millionaire" or "I enjoy my latte so it's not an expense worth eliminating if I need to feel deprived". That's just the story you tell yourself.
Perhaps you need to think differently. Our pals over at ChooseFI encourage "thinking a little bit differently". Frugality does not automatically imply you need to move out of your house, sell your car, ride a bike and live in a tent---all by tomorrow morning. It can, but the beauty is that it does not have to mean extreme deprivation.
In the financial independence and frugality community a term referred to as "the latte factor" has arisen. I believe the term originated with author David Bach. He even has written a great book titled The Latte Factor: Why You Don't Have to Be Rich to Live Rich.
But still, there are skeptics. I hear it all the time. Friends and family making excuses for why they just purchased a new car. New shutters. Remodeled their already remodeled kitchen. The excuses are always related to making themselves feel better.
Have you ever heard the statement "I am not making excuses but...". What typically comes after that statement. AN EXCUSE.
Take ownership of your finances and understand that the most important concept behind "the latte factor" is what you ultimately become in the process of eliminating a "fill-in-the-blank" expense.
The Real Cost of Your "Fill-in-the-blank"
What is your "latte"? What is the item that you immediately identify as a regular expense that you purchase at least once every few days, if not everyday?
Figure out how much that item costs you every month. Then take that monthly expense and plug it into this calculator.
For example, say I purchase a sandwich at work everyday of the typical work week. Say that sandwich costs $7. What if, instead, I could make lunch for $2 and bring it to work instead of buying that $7 sandwich? The immediate response is "I would save $5". Yes, but there is more! Now take that $5 per day and assume that you have approximately 20 weekdays per month which you would save that $5. For simplicity sake, that means we will save $100 just by packing lunch. Not bad. But it gets better.
Such a simple example yields over $100,000 difference over the span of three decades.
So imagine this, if you can adjust your mindset to think of "the latte factor", or rather, think of your "fill-in-the-blank" item that you do not mind giving up knowing it will add up over time.
Just assessing your lifestyle habits this way will change you. It will naturally adjust your mindset. It has the potential to train your brain to think differently. It might even eventually make you frugal. Who knows.
Taking this one step further, imagine you are able to find more than one item to save on over a lifetime. Now the potential savings can be in the millions instead of the tens of thousands territory.
So What's the Point if I Can't Every Have a "Latte"
The most common rebuttal to compounded savings is the concern that you will be depriving yourself. Yet that is not the point!
The point is that by choosing to limit yourself for a definitive period of time---like packing your lunch instead of that delicious hoagie for lunch everyday---you can ultimately choose to start purchasing that item again someday. The difference is that by limiting yourself for a defined period of time, when you ultimately choose to start spending that money again, you can restart the original behavior and then some! You can have your sandwich, and a new car, and a boat if you so choose. How? Because you chose to not spend on something for a defined period with the ultimate expectation to gain far more in the long term. This is the classic marshmallow experiment in action!
The Stanford marshmallow experiment was a study on delayed gratification in 1972 led by psychologist Walter Mischel, a professor at Stanford University. In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time. During this time, the researcher left the room for about 15 minutes and then returned. The reward was either a marshmallow or pretzel stick, depending on the child's preference. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures. A replication attempt with a more diverse sample population, over 10 times larger than the original study, showed only half the effect of the original study. The replication suggested that economic background, rather than willpower, explained the other half.
That's the power of choice. That is the power of delayed gratification.
Ultimately the choice to be frugal now is because you can. Because you will never be younger than you are right now. You can possibly handle more now. Work more now. Cut spending more effectively right now. Delay your gratification. That's what frugality ultimately is!
Leave a comment below. What's your "latte factor" item? How do you anticipate this delayed gratification to benefit you in the long term?
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.