The Power of the 'Latte Factor'

Photo source : subdollar.com

"How can I save if what I'm earning now is just exact to cover for my expenses? I'm living paycheck to paycheck. And I have debts to pay.  "

This is the one of the questions that I often hear. And in fact, this was also my dilemma before I learned to manage my finances.

The 'aha' moment was when I learned about the power of the 'latte factor'.

The Latte Factor is a term used by the author David Bach and is based on a simple idea that all you need to to do to finish rich is to look at the small things you spend your money on each day and see whether your can redirect that spending to yourself.

When I learned about this, I started to assess my spending patterns by giving myself a 7-day challenge which includes tracking the things I spend on.

Monitoring your expenses requires writing down every purchase you make no matter how big or small (including candy bars, coffee, softdrinks, transportation fare).

According to David Bach, the trick in this 7-day exercise is to be yourself and don't change your behavior. You should also spend money as you always have but you need to record or write all your expenses..

When I studied my expenses list, I quickly got the whole picture of where I'm wasting money. Then I decided on where it makes sense to cut back. It would help if you ask this question for each purchased item, "Do I really NEED this? Or do I just WANT this?"

An example of a list would be:

Date : March 1, 2012
Expenses

Items Purchased	Amount	Want or Need?
Bus Fare	12.00	Need
MRT Fare	14.00	Need
Starbucks Caffe Latte	110.00	Want
Starbucks Croissant	70.00	Want
Chicken and Rice Lunch	70.00	Need
Chocolate bar	50.00	Want
Frozen yogurt	130.00	Want
Softdrinks	30.00	Want
Chips	30.00	Want
Fashion Magazine	100.00	Want
Blouse	1000.00	Want
Milk Tea	95.00	Want
Movie fee	150.00	Want
Popcorn	50.00	Want
Food for Dinner	80.00	Need

I know some find this exercise too tedious but I think the writing part is necessary to give you a better understanding of where your money is going and to know the percentage of  your income you can allocate for your necessities. Can you live with 60% of your income or maybe lower it down to 50%?

After you accomplish the 7-day challenge, you can stop jotting down your expenses (if you hate doing it) because when you know the percentage of  your income that goes to your necessities, it would be easier for you to implement the money jar or the envelope system.

Let's go back to the above mentioned example. From the expenses list we can see that many of the purchases were just 'wants' and can be cut back to save a few pesos. The amount of the total expenses incurred is P1,991.00.  The items that the person thinks she NEEDS would amount to P176.00 only. Therefore, the difference of P1,815 is the amount of cash that can be saved and can be put to an investment vehicle that could yield a higher returns (i.e. stocks, bonds, mutual funds, etc).

Now, I'm not saying that you have to be a miser or a stingy person  in order to be financially free. Of course, we want to enjoy what we are earning and give ourselves a treat once in a while.  The point of this exercise is we need to learn to be conscious with our spending habits and see if there are things we can do without or replace it with something that costs less as not to deprive ourselves.

For example, if you are the type of person who can't start a day without coffee, you can consider drinking office coffee which is free or buy from a vendo machine that would cost less than P20 compared to Starbucks that costs more than is  P100 per cup.   
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In summary, the lesson we can derive from this money-saving strategy is that the thing that keeps us living from pay check to paycheck is that we spend more than we make on stuff we don't need. And putting aside a little as a few pesos a day for your future than spending it on little purchases such as lattes, bottled water, cigarette, magazines and so on can can really make a difference.


So, are you up for this challenge? Can you make the power of the Latte Factor work for you?

Takeaway Lessons from Celebrities Who Went from Rich to Broke

 photo source : thegooddrugsguide.com

When I heard about the death of the famous singer, Whitney Houston, I was saddened by the news. She was one of my favorite artists way back in 'The Bodyguard' days because of her exceptional talent and grace. I witnessed her rise to stardom and fortune to being broke. And as I pondered upon her dramatic life of  fame, broken marriage, drug addiction and financial crisis, I realized that  making lots of money or a celebrity status is not a key to financial security. And Whitney Houston is not alone...

Other celebrities who were reported to have filed for bankruptcy are as follows:

Photo source : hdmusicvideos.org

• M.C. Hammer - Remember the 90s hit “U Can’t Touch This!,”?  the hiphop star was a huge money earner but was forced to file for bankruptcy in 1996 with $13 million in debt. M.C. Hammer earned more than $30 million in one year , but after purchasing a $12 million mansion in Fremont, California with 200 paid staff, and 40-plus entourage, he soon found himself unable to support his lavish lifestyle 

photo source : hollywoodreporter.com

• Mike Tyson - Once the most feared world boxer who earned more than $400 million during his boxing career. But Mike Tyson's extravagant lifestyle  - filled with mansions, wild animals, and a large entourage combined with an expensive divorce led to his bankruptcy in 2003, with debts reaching $27 million.

By studying the life of these stars, we can see common patterns that led to their bankruptcy:

• Lack of Financial Education - Often, when you go from having nothing to having substantial amount of money, a financial education is not part of the package.This also holds true for lottery winners who have lost their money after winning millions of dollars/pesos. Many celebs think that they won't lose what they have since they are earning a lot. Their attention is focused more on buying the biggest house or luxury car than learning how to handle their finances.
• Lavish Lifestyle - Celebrities, like the rest of us, can get caught up in having the finer things in life. The more you earn, the more you think that you have every right to justify expensive purchases. 

Since many celebrities don't have long-term financial goals, when the money stops coming in, they become vulnerable to financial struggles. These famous stars are living testimonies of the common misconception that you have to earn more to save more.

With this, it is important to note that the reason most people fail financially is not because their incomes are too small, but because their spending habits are too big.  As we simply say, spending beyond one's means.  This may sound very basic, but it's true.

Controlling your spending is just half part of the solution, the other half is learning and committing to saving and investing a portion of your income no matter how small or big your paycheck is.