One of my favourite phrases is the Latte Factor. Coined by financial commentator David Bach, it refers to the money we fritter away thoughtlessly on small expenses such as coffee each month, and that could grow to a tidy sum if invested.
Bach even invented the Rule of 752 to motivate you - simply multiply your weekly latte spending by 752 and the answer is the amount you would have in 10 years if the money you saved was invested wisely. The rule is new to me but it looks sound – it uses a rate of return of 8 per cent.
The use of the word latte is surprising – any of you who have been to America would know that their idea of coffee is a large thermos full of murky black liquid. However, it does give me hope that a decent espresso will be easier to find when I’m there next time.
But quality of coffee aside, remember that success or failure seldom comes in one single cataclysmic event - usually it is the result of countless small actions done, or not done, over many years. Unfortunately, we humans tend to be creatures of habit, and replacing bad habits with good ones can be hard work. It’s much easier to pretend to ourselves that we will start tomorrow, but, as we all know tomorrow never comes.
This inbuilt reluctance to take steps to move from where we are, to where we want to be, is called procrastination. There are only two ways to beat it – the first is to tackle it head on, the second is to put strategies in place to make sure that essential tasks happen automatically and are not just more chores to be done when you get around to it. I call them "set and forget".
Converting your home loan repayments from monthly to fortnightly is a great example. All you have to do is complete a bank debit form then put it out of your mind. It is a guaranteed way to save a fortune in interest and is effortless. Borrowing for investment and reinvesting the dividends is another great way to boost your finances – once it is all in place you have nothing else to do but pay the interest.
But the Latte Factor is not necessarily about coffee - it is a reminder of the way small items can accumulate. Think of your monthly credit card bill – if you're like me, you’ll be shocked at the way a couple of pages of relatively small amounts can grow to such a large sum.
The good news is that once you start harvesting small sums, instead of unwittingly spending them, you'll be amazed at how quickly they will grow.
Every family has different spending priorities, but in a typical family areas where big savings can be made easily and quickly include expensive mobile phone plans, inappropriate credit cards, overpriced air tickets, and unused club and gym memberships. Most of us can make large savings in these areas and the way to get going is to simply dedicate one hour of your life to getting started.
Often there are so many choices that you may feel overwhelmed, but fortunately there are websites to help. For instance, infochoice.com.au provides free, independent and unbiased advice for financial products like savings accounts and credit cards, and finder.com.au is great when choosing between phone plans.
Above all, the Latte Factor is a reminder that we are driven by habit. As the Latin proverb says, "A nail is driven out by another nail; habit is overcome by habit".
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. email@example.com