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?

Budgeting in Style - The Envelope System

My Cash Envelope System

I know that many people hates budgeting. I understand that listing down all your expenses everyday to the tiniest detail can be a tedious job. 

I too feel the same way. When I tried that technique before, it only lasted me for a week then I was back to my old routine of being unconscious with my spending.. 

But I learned another budgeting style that worked for me. In this technique I don't have have to list down my expenses everyday.  I also find it easy to implement because I only do it once or twice a month right after I receive my paycheck, after each pay period. But it definitely helped me from overspending, it organized my finances and now I spend my money more wisely.

This is called the Cash Envelope System. 

There are different varieties of this system. Others call it the Money Jar System. But the concept is just the same. 

Both systems entail separating your income into different accounts for specific purposes.

To implement this system you need to :

• Have several envelopes or you can buy a cash envelope with several dividers inside like the one I'm using (refer to the picture above). Or you can also use several jars

• Decide what categories you will be using for your budget and label you envelopes/jars accordingly. 

          Let me share with you my categories and the corresponding percentage based from my total income. This was derived from T. Harv Eker's Money Management System:

        

          A. Financial Freedom Account (FFA) - 10%

          This is the money that you will NEVER spend and can only be used to purchase passive income streams or investments that will grow your money. Examples of these investments are stocks, mutual funds, UITF,  insurance, government securities or capital for your business. This can be your retirement account. Think of your FFA as the golden mother goose that lays you golden eggs! 

          B. Long Term Savings for Spending (LTSS) - 10%

          This is my emergency fund. The money I put in this account are kept in the bank for easy withdrawal. This can also be used for major expenditure like house repairs, children's education, hospitalization expenses and for other emergency purposes.

           C. Give - 10%

           Giving back to God is my first expense. I allot 10% of my gross income for tithes and for 
donations to my chosen charity and foundations.

Envelope System

           
            D. Necessities - 50%

            This is the account I consume to settle all my essential bills such as phone bills, electricity, food, clothing, transportation, gym, etc. If you can't survive on 50% of your income, then perhaps you have to analyze your spending habits... simplify your lifestyle. 

            Remember to ask yourself when purchasing things - "is this a want or is this a need?" I have found that i want a lot of things but i do not need them. This has saved me a lot of money.

             E. Play - 10% 

             This is my favorite account. It's my favorite because I believe that you don't need to be a miser in order to become rich. You have to feel good about yourself and have some fun!  

              I spend this account every month to pamper myself. Like having a haircut, massage, manicure, pedicure, eating out in my favorite restaurant, watching movies, etc. I spend all of this Play money every month so that I will feel good about having money and spending it! However, if I need to save up for things such as travels or gadgets that require a little more money, I accumulate my Play money for  few months before I use them.

             F. Education - 10%

              I love learning new things. That's why I have an account that would finance my need for continuous education, such as for books, seminars and trainings.  

That’s it!

Anyone can use this system regardless of how much money they earn.The percentages are not fixed and can vary depending on your spending needs.  What makes this system effective is that it enables you to develop a habit of managing your money. It may take some time to get used to this new way of budgeting but you need to have the discipline to stick to this plan and to make it work. 

What's Your "Emotional Why" ?

"Why do you want to become wealthy?"

This is the first question that you should ask yourself in order to achieve financial success. As what Bo Sanchez said, "You need a fierce emotional reason to become wealthy - or it won't happen."

This "emotional why" will give you the fire to succeed!

This may result from the painful or unforgettable experiences you had in the past that made you think, "If I'm rich, then I can achieve/have this...."

When I made a decision to undertake this journey, I spent some time reflecting why I want to become rich. This process was not easy because I was torn between the desire of financial freedom vs. security. These 2 concepts are not the same.

Security means that you have enough money to pay the bills or some extra to have a comfortable lifestyle or enough funds for retirement. But my dreams go beyond that.

So I said to myself, "I won't settle for security. I want to achieve financial freedom so I can fund my dreams."

Let me share with you what these dreams are:

DREAM # 1 : TO BUILD AN ORPHANAGE

with the kids of Virlanie Orphanage

When I was in college, my thesis in Psychology was to study adolescent orphans and how their identities were developed.  We constantly visited 2 orphanages for 3-4 months and spent a lot of time with the kids and teens who lived there. From our study, we discovered that orphans have a hard time trusting people because of their painful past wherein they were abandoned or abused by the same people they trust - their family. At first, I had difficulty gaining the trust of my respondents but after some time, they broke that thick wall and revealed to me their innermost feelings, fears and dreams. By the end of our study and when we bid them goodbye, some were crying. Then one orphan approached me and tearfully said, "Lahat na lang ng napapalapit sa akin nawawala." (I lose all the people I care about). And those words crushed my heart!

So I said to myself, "Someday I will have my own orphanage where these kids will have a happy home."

And this dream never left me.

DREAM # 2 : FINANCIAL EDUCATION FOR WOMEN AND KIDS

I dream of having an institution that focuses on teaching financial literacy and money management to women and kids.

www.myddnetwork.com/Teach-Kids-to-Save-Money

Why women? I heard a lot of sad stories where wives let their husbands take full control in matters related to money and finances because they believe that money management is a "man thing" and were left peniless in cases of separation. Or a story of  a single woman who is drowning in debt because she doesn't know how to handle her finances. These are just some scenarios where women are left in the dark and want to cry out for help but don't know what actions to take.

Why kids? I believe that forming the habit of saving and properly handling money should be taught to children because they will be bringing these skills as they grow older. And sad to say, this is not part of our current educational system.

DREAM # 3: ENJOY LIFE! 

After I watched the movie "Eat, Pray, Love", I imagine myself having that kind of adventure. I want to travel around the world, see beautiful places and experience different culture. I also dream of having a beautiful house that is surrounded by a lake. I want to explore the world and enjoy life to the fullest!

Publish Post
These are my "Emotional Why"

What's yours?

The Book That Started My Journey

It was last November 2010 when I purchased the book that changed my life.

Actually, that was not the first time I noticed book, "Rich Dad Poor Dad" on a bookstore shelf or heard about it from other people. But I didn't bother to take a look at it, more so, buy it.

But God shows us the way during times when we are seeking for answers.

Again, I stumbled upon this book during that time I was looking for direction in my financial life. And something inside urged me to purchase it.

Before I read the book, I was nagged by the thought that at the age 32 and with 8 years experience working as an employee, I had no savings and investments. (please read my first blog entitled My Past to learn more about it). I felt like that I was just going through the motions - without a direction.

I thought that a bigger salary will solve my dilemma. But transferring from one company to another that offers a higher pay or having a salary increase was not the answer. Ironically, my expenses and credit card debts even became higher!

Little did I know that a single book would change everything.

Rich Dad Poor Dad by Robert Kiyosaki is a fascinating story of how the author's Rich Dad taught him the lessons he needed to learn to make himself financially independent. 


This book opened my eyes that some things that we thought are assets are actually liabilities - for example : a house or a car. Moreover, because of my addiction to shopping I even  justified to other people and to myself that my quality/branded clothes, shoes and bags are assets!

While reading the book, I encountered a lot of "Aha" moments when it comes to money management, investing and personal finance .  It provided the basics to my quest for financial literacy and opened my mind to new possibilities. 

Because of this book, the lady who used to be a "bargain-holic" became addicted to learn the ways and the means to become financially free. 

My Past

I like my money right where I can see it - hanging in my closet.  

           ~From the television show Sex and the City

I was a certified "bargainholic". Finding and buying something on sale or on a discount gives me a very special feeling - it thrills me...it excites me! In fact, the less I pay for an item (my faves are clothes, shoes and bags), the more it has worth to me.

My favorite past time was going to the mall, tiangge, bazaars, and the UK (ukay-ukay). These places were my haven. 

A typical weekend for me is going to the mall at 10am or 11am (time the mall opens), I go in from one store to another, patiently searching for clothes, shoes and bags to try on.  And even if I have less cash on my purse, I don't care! I have my 2 cards : my visa and mastercard. I would always had reasons to justify my purchases, such as "Oooh! This beige bag will perfectly match the top I bought last week...and besides it's 50% discount so I think it's a good buy."  

My stamina for shopping was so strong that I can stroll around the mall from 10am up to 8pm. Wow, that's 10 hours on non-stop shopping! Did I get tired? Time passes by so quickly when I shop and I  only feel the fatigue when I arrive home from a full-day shopping spree.

A trip to my closet would give you an idea of this passion. I have a closet full of clothes, shoes and bags...and some of them bought years ago but never worn or used. 

I don't shop because I need something. I just shop for shopping's sake.

                                                                                     ~ Cat Deeley

 

And whenever I would set a goal of saving, I find it so difficult to implement it because aside from the temptation of my hobby (shopping), at the age of 32,  I lack a very important skill --- and that is financial literacy. 

              The number one problem in today's generation and economy is the                                      lack of financial literacy. 

 ~ Alan Greenspan