Finish Rich with the 'Latte Factor' — AKA Cutting Out Unnecessary Treats! — Says Author David Bach
The financial adviser gives PEOPLE simple tips for saving small amounts that grow big over time
Twenty years ago, bestselling author and investment adviser David Bach came up with the concept of the “latte factor” — if one saved the money spent on small purchases, such as a fancy coffee and muffin each morning, and invested it wisely over time, one could save big, possibly a million dollars in several decades.
The latte, says Bach, is a metaphor for anything you regularly spend money on that is not absolutely necessary, such as cocktails after work. “You’ve got to figure it out,” he says.
The secret, he says, is starting to save early and putting the money in a stock market account that makes money for you over time, thanks to the power of compound interest. As Bach told PEOPLE in 2001, “A latte spurned is a fortune earned.”
And while no one can predict the stock market, Bach says a 25 year old who starts putting away $10 a day could have almost $2 million by age 65 in an investment earning 10 percent a year. (From 1975 to 2018 a diversified portfolio of 60-percent stocks and 40-percent bonds has had an annualized return of 9.9 percent, says Bach.)
“It’s so much easier to become wealthy when you start when you’re young,” he says.
Bach, a father of two sons, credits much of his financial wisdom to his paternal grandmother, Rose. Though she had no degree, she retired as the head wig buyer for Gimbels department stores with a $1 million portfolio. Grandma Bach, he told PEOPLE in 2001, encouraged him to buy three shares of McDonald’s when he was 7.
But Bach hasn’t always been financially savvy. While an undergraduate at the University of Southern California, he ran up $12,000 in credit card debt buying designer clothing and dining in fancy restaurants.
After his parents lent him $2,000, he started a t-shirt company and used the profits to pay off his debts. “I tell people I know what it’s like to open my bills,” he has said, “and have the room spin.”
Bach went on to join his father’s financial advising practice and write his first financial self-help guide, Smart Women Finish Rich, which became a bestseller in 1999.
Nine consecutive New York Times bestsellers and 7 million books sold later, Bach shares some simple money saving tips that he says can lead to financial freedom:
Find your latte factor. “You might have to give something up,” he says. That might be not eating out a meal a day at a restaurant or not having a latte in the morning, he says. Bach’s 9-year-old son has already figured out his latte factor: the money he spends on virtual currency to play video games.
Make saving automatic. No one ever builds wealth by budgeting and writing checks, according to Bach. “The best ways for you to save,” he says, “is to have money moved automatically from your paycheck or your checking account into your retirement account.” Retirement account options include an IRA and a 401(k).
If possible, buy a home. “You can’t get rich renting,” Bach says. “The latest stats are that homeowners are 46 times wealthier now than renters.” Purchasing a home when you are in your 20s, 30s or 40s and paying it down, Bach adds, “leaves you with a whole lot of money in the home in terms of equity.”
What matters most is starting to save. Even socking away $5 a day, the cost of a latte, makes a difference, he says. “The miracle of compound interest,” he says, “works when you work it.”