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The Latte Factor

“The Latte Factor® is based on the simple idea that all you need to do to finish rich is to look at the small things you spend your money on every day and see whether you could redirect that spending to yourself. Putting aside as little as a few dollars a day for your future rather than spending it on little purchases such as lattes, fancy coffees, bottled water, fast food, cigarettes, magazines and so on, can really make a difference between accumulating wealth and living paycheck to paycheck.

We don’t even realize how much we’re actually spending on these little purchases. If we did think about it and change our habits just a little, we could actually change our destiny.

Still not convinced? Consider this:

$5 per day (the average cost of a latte and a muffin) x 7 days = $35 per week

$35/week = $150/month

$150 per month invested at a rate of 10% annual return =

1 year = $1,885
2 years = $3,967
5 years =$11,616
10 years = $30,727
15 years = $62,171
30 years = $339,073
40 years = $948,611

(via finishrich.com)”

I just finished the book “The Automatic Millionaire”. I grabbed it from the library and boy is it quite worn out. I guess many have read the book.

Who is this book for?
– Anybody of any income really
– Someone who doesn’t really quite like to budget everything
– Someone who doesn’t like to deal with finances on a regular basis, but yet still wants to retire comfortably

“But I’m already living paycheck to paycheck! I don’t have money to save for retirement?”

That’s where the Latte Factor comes in. I’m sure many have heard from your financial advisors that if you give up your one Starbucks coffee a day, you can save $5/day and that compounded over 40 years would make you very rich. But of course Bach is not saying stop drinking Coffee Bean or Starbucks. All he is trying to say is, we spend 8-12 hours working a day. Is it really that unreasonable to keep 1 hour of your wages to pay ourselves?

If you are like me and don’t like tracking every single cent you spend (it can be quite a pain really, and hard to keep up), Bach challenges you to just track your spending over a single 7 day period. Just 7 days of tracking is all you need to know where you can save your extra $5 from. Once you are convinced it’s possible, the next big secret is: AUTOMATE IT.

Bach argues that if 10% of your money leaves your account before you ever see it, you won’t miss it! Singaporeans would understand this really well. Every month, 20% of our money automatically gets deducted into our CPF. We’re still surviving right? So likewise, if you were to giro out an additional 10% out of your paycheck each month, you know you make it. And because it’s automatic, you won’t feel it.

Imagine if we had to manually transfer out 20% to our CPF each month. We would feel the impact of ‘losing’ that money, and it’s a monthly affair. After a few months, we might even fall behind our contributions. Take yourself out of the factor and do yourself a favor. Automate it – you only have to do it once.

Home ownership is really another form of automation for us in Singapore, since our payments are automatically deducted from our CPF each month, and we steadily build equity. Bach encourages making extra payments to shorten the mortgage. That might or might not be a good idea in Singapore, since interest rates here are so low compared to US or UK, where low means 5%, whereas our low can be 1.5-3%.

Check out the book and read how you can automate your finances and eventually become an automatic millionaire.

(These days though, billion seem to be the new million.)

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