Back in 2009 I was in my final year of graduate studies at the Leeds School of Business and watching my money pretty closely. I had taken out a student loan I was hoping I didn’t need because I worked almost full time though the first year of my program and continued to have freelance work during the second year. I was also living on less than $1300 per month. The loan didn’t begin accruing interest until 6 months after I graduated so essentially it was free money to me. I took it out and put it in a money market account where I could make a little interest on it while pinching pennies and hoping I could just pay back the principal back after graduation.
Then a book was released called “The Latte Factor.” Because I was pinching pennies I checked out the synopsis on the website. “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.
I’m a data nerd – I track everything from mile run to calories eaten – so this idea appealed to me. Like a good MBA candidate, I set up a spreadsheet and started logging my spending. $3 for a latte, $6 for a sandwich, $25 for gas, $4 for a glass of house red, and so on. By the end of 2010, I know exactly what I spent each day.
I compared one month to another to find out why I my “eating out” budget varied from one month to another. It turns out almost all of my close friends have birthdays in September and birthday dinners are typically expensive. I noted the seasonality of my recreation budget. Skiing is expensive, running is not, but maybe I should start picking and choosing how many races I register for. I noticed how much I spent on coffee because I was working mostly from home and could focus a little better at the coffee shop across the street. I wondered if I could write that off for office rent.
Another byproduct of this tracking was guilt. Several days a week a couple of my coworkers and I wander over to the local tea shop for an absolutely fantastic minty tea concoction that is on sale from 2-4pm. It costs $2.40. If we go three times a week, which is realistic, “The Latte Factor” would say that is $7.20 of unnecessary spending per week, $28 per month, and $345 days per year that is not getting me closer to retirement, or a plane ticket to a beachy destination. The problem is that I go because I really enjoy it and we bounce a lot of ideas off one another on these walks. Then, I immediately feel a little guilty when I log, “Winter White” onto my spreadsheet. $2.40.
I started wondering if this constant logging of small expenditures is causing me to miss the forrest for the trees. I have automated my savings, my 401K and contributions to my ROTH IRA. I closely watch my mutual funds and am constantly talking to people and reading about more effective ways to save and invest towards my goals. I have no debt what-so-ever, have no balance on my credit cards, and rarely (with the exception of buying myself a bunch of gifts for my 30th birthday) spend all that much money on anything. Sure, I could probably eat out a little less, not have a glass of wine before bed and not walk out for tea in the middle of the afternoon. But as long as I’m meeting my savings goals, shouldn’t the rest of my money be available for me to use guilt free?
I’m a big believer in Timothy Ferriss’ quote, “What gets measured gets managed” but in this case, maybe I don’t need to measure or manage quite as closely. What do you think? How do you manage your personal finances?