The Automatic Millionaire: Chapter Two

by Joseph · 0 comments

in Friday Book Club

Today’s Friday Book Club will feature chapter two of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich. The second chapter of The Automatic Millionaire is entitled ‘The Latte Factor’ and focuses on an idea of David’s (which he dubbed ‘The Latte Factor’) which in a nutshell says that anyone can save money by watching their unnecessary expenditures, such as a morning latte at Starbucks, which could be replaced with homemade coffee at a fraction of the cost.

The Latte Factor 

In the early parts of this chapter David explains how he coined the phrase “The Latte Factor.” He was teaching a four-week investment course years ago when one of his students spoke up and told him that his ideas were unrealistic and not really feasible in real life. David, being somewhat offended by this remark, asked the woman to explain. She said that it wasn’t really possible to save 10 dollars a day, that she was living paycheck to paycheck. David called her out on this and asked if she would play along and walk him through a typical day with all of her expenses. She has no problem with this and they begin his little game. It turns out that this woman spends over ten dollars before she is even through her work day! Of course we all have these bad financial habits, whether it be for a latte from starbucks or a pack of cigarettes or maybe even a bag of chips from the vending machine every day. These little expenses can add up quickly. As David puts it a latte a day (at $3.50) adds up to roughly $1,260 over the course of a year.

What That Latte Really Costs

After David covers how these small-item spending habits can cost us thousands a year he works some numbers and figures out how much this woman that he had been talking would be able to save over the course of 42 years at a 10 percent return if she cut down her daily spending habits and saved $5 a day, which is about $2,000 dollars a year. If this woman would do this simple act she would be able to save close to 1.2 million dollars by the time she hits the young age of 65. It sounds amazing doesn’t it? This is one of the reasons that I wanted to start this site, and why I am reaching for a target twenty-something audience. Compound interest (which means earning interest on your interest) is a powerful force. I believe it was Einstein who said it is the most powerful thing in the universe. Twenty-somethings (or even those in their later teens) are still young enough where they can truly take advantage of the power of compounding interest. Twenty-somethings are also a very self-gratifying generation. We know what we want and we get it, which isn’t always what is best for us in the long-term. I do believe that for some people “The Latte Factor” is a very viable alternative for finding ways to save money. If this saved money is investing wisely (which truly is not a terribly difficult thing to do) then it can (and will) lead to future wealth.

Overall I found this second chapter of The Automatic Millionaire very gratifying. It has some fantastic principles and sound advice for anyone to apply to their own lives. If you haven’t checked out this book yet I’d encourage you to get it, or at the very least check it out from your local library and give it a quick read (it’s very easy reading). David does a great job relating to anyone and giving sound advice, while keeping things entertaining.

A Financial Tool For Your Use 

For those who are interested I threw together a spreadsheet which you can use to calculate how much money you could save over the course of forty years by cutting back on your expenses and saving a certain dollar amount a day. It’s a really easy spreadsheet to use, just plug in the dollar amount which you think you can save a day into the dark green box, which will then calculate the monthly savings and plug that number into everything else. The blue box will show the amount that you will have accumulated after forty years. Give it a try, you can download it by clicking HERE.

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