Stop Eating Your Retirement: How to Become a Millionaire with your Current Income

David Bach, personal finance expert and the author of “Finish Rich” book series, used to provide classes to people on topics related to personal finance.  One day, a student told him that his information was useful, but they just had no income even to attempt to save for their retirement. 

From my own experience, I have also been told the same thing.  People are merely living pay check to pay check and have no surplus money even to consider saving toward retirement.

Bach though, had a great solution to the problem that he would offer during his class.  He would have his students share their daily habits.  During this time, Bach would record how much money the individual spent on a daily basis.

Since visiting a favorite coffee shop has become a common and daily routine for most Americans, David Bach focused on that.  Spending $5 at your coffee shop is not an outrageous expense.

If you had a daily habit of drinking a $5 cup of coffee, say from the age of 20 until you were 60, you would spend $150 a month, $1,800 a year, and a grand total of $72,000 for the entire 40 year period.

What David Bach then pointed out to his students was this, the coffee did not cost the student $72,000.  Instead, drinking a $5 coffee for 40 years would end up costing $956,517.


David Bach coined this as the “Latte Factor.”  Even if you don’t drink coffee, keep reading, as you probably have your own “factor” that is holding you back.

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Are you Eating Your Retirement? Using the Latte Factor to identify opportunity cost may help you find the money you need to fund your retirement plan.

Opportunity Cost

Before I get too far into the nuts and bolts of the Latte Factor, I would like to discuss a finance principle called opportunity cost.

Opportunity cost is simply:  What you would miss out on if you chose one option over another?

Due to the principle of scarcity, there are simply not enough resources to do everything we want.  In terms of personal finance, the resource is money.  Therefore, we must make choices on how we will spend our money since we have a limited supply.

For example, when I was a child, I would earn $5 allowance every week after I completed numerous chores.  I would often spend this money on a toy during the following week which would cost the entire $5.  One week, in particular, I recall also wanting to get some candy bars.

But there was a dilemma.  I couldn’t get both the candy bars and the toy.  A choice had to be made, the toy which would offer me enjoyment over an extended period, or some candy which would provide me with temporary delight.

This example shows what opportunity cost looks like for a child.

For adults, opportunity cost looks like the scenario in the beginning.  Do you buy a coffee at your favorite chain, or do you place that little bit away for your retirement plan?

The Latte Factor

David Bach would have his students consider more than just drinking coffee for the Latte Factor.  The goal he had for his students was to determine how much money they spend during the day that was not needed or could be cut back.

There are several places to look for this.  The obvious would be coffee.  But other examples would be smoking or other tobacco products, getting snacks at a convenience store, eating lunch or dinner out, or even in-app purchases on your cell phone.

As everyone is unique, so are our spending habits.  Therefore, the list of possible items which could make up our own “Latte Factor” is endless.

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Calculate your Own Latte Factor

Your individual “Latte Factor” is the calculation of how much money you spend every day on the “small stuff.”

To figure out what your personal Latte Factor is, David Bach advises keeping a notepad and for just one day writing down everything you spent money on and how much you spent.  And by writing everything down, he means everything.

Write down how much you spend at your coffee shop in the morning, at the gas station getting an energy drink, the snacks from a food truck, the lunch at fast food restaurant, the pack of cigarettes that you smoked, and so on and so on until the day is over.

Add up all of your expenses from the day.  Now, my friend, you have calculated your own Latte Factor.

Your calculation may look something like this:

Coffee from chain store – $5
Energy Drinks – $3
Snacks at Food Truck – $5
Lunch at the Fast Food Joint – $10
Cigarettes – $7
Total Expenses (Latte Factor) – $30

If your expenses look something like this, just remember, this is only one day.  If you drag these numbers out of the course of a 30 day month, you are looking at $900 spent just on the small stuff.  

In the military, having daily expenses such as these would eat up approximately half of the base pay for a junior enlisted Service Member.  The above expenses did not take into consideration eating dinner out or the consumption of alcohol. Both of these acts could easily consume the remainder of anyone’s paycheck

I want to take a moment and address people that will object to not drinking coffee and are thinking I am telling you to stop eating lunch.  I am not telling you to do either of these.  Instead, I am hoping you will realize the extent of your spending and find alternate solutions to your daily life.

Could you brew your own coffee at home for about $1? Yes.  Could you bring your own food from home which would cost only a few dollars a day?  Yes.  By seeing how much we are spending every day, we can adjust our habits to begin saving.

I do not expect anyone who is living paycheck to paycheck with the above expenses to do a complete 180 on their life. But, I would hope they could find the fortitude to cut back their daily expenses by about $15 a day.

What Cutting $15 a day Would Bring Back to You

Would you agree that cutting $15 a day of waste out of your life is a doable goal?  Let’s see what this goal could end up earning you.

Some assumptions I am making for these calculations are that you started at 20 years of age and continued with your $15 a day savings until you were 60.  Why 60?  It is the age you can collect from your Thrift Savings Plan (TSP) and Individual Retirement Account (IRA).  (I know it is actually 59.5 years old, I just wanted to have a full year for the calculation.)

Another assumption is that you are going to invest the $15 you save every day.  It wouldn’t do us any good if you simply saved money by making lunches only to spend it on something else.

Also, for the calculations, I will be using 10% interest.  There are two reasons for this.  One, David Bach uses this interest in his examples to his students.  Since the Latte Factor is his thing, I figured I would honor his assumption here.  The second reason is that earning an average of 10% over 40 years with a TSP account or an IRA are entirely doable.  (The S&P 500 has averaged about 12% over the last 90 years.)

So, investing only $15 a day would come out to $450 a month, or $5,400 a year.  If you contributed $5,400 a year for 40 years, you would have contributed $216,000.  Let that sink in for a moment before I go any further.  Wasting only $15 a day is nearly a quarter of a million dollars over 40 years.

Anyway, back to the math.  Let’s now add in the interest earned from contributing $450 a month into a retirement plan for 40 years.  At the time you are 60, your retirement account would have a value of over $2.8 million.

That’s right, your coffee, smoking, eating lunches, or whatever your vices are is keeping you from becoming a multi-millionaire.  Again, let that sink in for a moment.

Should you have made these contributions into a Roth TSP or Roth IRA account, you would have already paid the taxes on your contributions.  This means that $2.8 million is yours tax-free.

What if you are married, why not make a challenge out of this.  By both of you finding $15 a day to cut out on spending, you would effectively double the value of your retirement account.

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Automate your Investing

If we were to have that $15 a day deposited to our bank account with each paycheck, then there may be a tendency to spend it.  To fix this problem, we need to automate our investing.

This is very easy to do.  For those of you who invest with TSP, you can set up your contributions with myPay.  Once that is done, you only have to log into your TSP account once to set up how you want your deposited funds to be invested.

That 10% I mentioned earlier, you won’t earn that in the G Fund.  Don’t get distracted by the guaranteed growth.  Over the course of 40 years, any negative downturn of the market would be wiped away.  Don’t let the crash of a decade ago deter you from investing today.  Especially when today we are having record highs.

For those of you who invest in an IRA, an allotment can be set up to automatically deduct the funds from your paycheck and transfer them to your brokerage.  Typically, within the brokerage, investing a fixed dollar amount can be established to purchase a mutual fund which meets your investment needs.

No matter what path you go down (TSP or IRA), it is a two-step process to automate your investing.  One is to set up the contributions, and the second is to set up how they are invested.  Yes, it is as easy as that to auto-pilot your way to a become a millionaire.

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Advertisement Break

I was actually looking for the high quality AFN advertisement which discussed the cost of smoking to put in here.  Unfortunately, I was unable to find it on YouTube.  But, I did find this short video which I feel hits the nail on the head.

What I really liked about this video is not only do they portray the cost of smoking, but they do a great job at reflecting the opportunity cost of smoking.  There is that term again, the one the David Bach and the Latte Factor attempt to highlight.

Bottom Line

When we think about saving money, the focus tends to be on the large dollar items.  Unfortunately, we overlook the little things in our life.  And, it is the little things that are robbing us of our hard earned money.

For just one day, if we were to record our expenses, we could highlight what David Bach calls the “Latte Factor.”  The latte factor is everything we purchase daily that we could either eliminate or reduce.

By saving as little as $15 a day, you could easily become a tax-free multi-millionaire.  But, this requires us to invest our savings.

Savings can easily be automated with TSP or an IRA with the use of an allotment.  You only need to set up the contributions once, establish your investment guidance just once, and everything from there on out is automated.

If you fail to identify the waste in your life or fail to invest it appropriately, you could end up eating and drinking what could amount to millions of dollars in your retirement account.

Should you wish to learn more about the Latte Factor or David Bach’s simple guidance on becoming a millionaire, I would highly recommend reading The Automatic Millionaire.  You can get it used from Amazon for what you are going to save on not going to your favorite coffee house tomorrow.

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