Once you have automated your savings, create a budget so that you will live on what’s left. Here’s where lattes and avocado toast come in. Image: Rachel V Ward/Shutterstock.com
By: John GrobeCan avoiding a daily latte, or avocado toast put you on track for a successful retirement? According to financial author David Bach, yes it can. Others have made similar statements in the past.
Going back to the 1996 book The Millionaire Next Door, authors Thomas Stanley and William Danko made the point that wealth is not what you make, it’s what you keep.
Going back even further than that is the phrase, “If you don’t see it, you won’t miss it.” I remember hearing that during the annual Savings Bond drives. Savings Bond drives faded into obscurity with the advent of the FERS retirement system and the Thrift Savings Plan. You might have heard the phrase from your parents as you entered the workforce.
In his 2004 book The Automatic Millionaire, Bach encouraged people to “pay themselves first”, setting aside one hour’s earnings for their own goals (retirement related or otherwise). This advice goes hand in hand with not seeing and not missing savings and investments.
How is it possible that I do not see and do not miss the money I’m setting aside? By automating my savings, that’s how. That’s also where the title The Automatic Millionaire comes from. And we have tools at our disposal to automate our savings.
We fund the Thrift Savings Plan by payroll deduction. In fact, other than a rollover from another plan, payroll deduction is the only way in which we can put money into the TSP.
You can also set up allotments from your paycheck and have money sent to a financial institution. You could do this for retirement by funding an Individual Retirement Arrangement (IRA), or for other purposes (e.g., vacation, kid’s college, etc.) through another type of account. Your payroll office should be able to help you set up allotments.
Once you have automated your savings, create a budget so that you will live on what’s left. Here’s where lattes and avocado toast come in. Bach created the phrase “The Latte Factor” as a metaphor for anything that you might spend extra money on that you could happily do without. If you cannot happily do without your morning latte, then don’t give it up; pick something else. Stop smoking cigarettes, or at least cut back. Pack your lunch three days a week rather than eating out every day. Don’t buy a fancy muffin on your morning break.
An ironic twist to the concept of the latte factor is that Bach’s website offers coffee cups for $15, T-shirts for $18, and hats for $32. Hmm, I wonder if I can happily do without these items.
In examples, Bach uses a 10% rate of return to show how small savings grow into larger amounts over time. Some might argue that a 10% return is unrealistic, but since 1926 the stock market has averaged 10% per year. The TSP’s C Fund has averaged 12.03% over the ten-year period ending 12/31/23, and 10.81% since its inception back in 1988.
If you’re early in your career, consider the power of compound interest – the value of small contributions over long periods of time.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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