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David Bach, in The Automatic Millionaire warns us of the Latte Factor: how small, daily costs add up to big expenses. Whenever the Latte Factor is mentioned, shocking numbers always follow: for example, if you don’t by a $4 cup of coffee daily and instead invest the money, after thirty years you will have $263,000. Bach has a Latte Factor Calculator on his website where you can adjust the numbers to your situation.

While the mathematics of the Latte Factor are undeniable, thinking only of the long-term investment value of every cent leads to an aesthetic life. There was an interesting rebuttal to the Latte Factor in the New York Times on enjoying the small expenses in your life.

While I love planning for the future, I’d like to propose a compromise between blowing money on lattes and never doing so:

The Latte Tax:

Each time you buy yourself that small thing that you enjoy, like a Latte, tax yourself. Put an equal amount of money toward the most fiscally responsible, long-term goal you can achieve. Appropriately I started writing this article from Starbucks. I paid £4.10 for a Latte and blueberry muffin. When my bank statement arrived, I saw the Starbucks line and transfered £4.10 into my retirement account.

I like going to Starbucks and other coffee shops. They are an important part of my working routine. If, at the end of each month, I tally the Starbucks lines on my debit card statement and add that amount to my retirement account I can enjoy what I like and plan for the future as well. Tax yourself and enjoy life’s small pleasures, guilt free.

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Header photograph by journeyscoffee

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Another personal finance blogger has conducted an interview with a burglar to find out where the best places to hide your valuables are. From the interview:

I had quite the interesting conversation this weekend with a person who happened to be a former burglar. It was great timing because I was wondering if something like the skid mark underwear for hiding money would really work. I also figured that if you wanted to know the best place to hide your money from a burglar, a former burglar was the person to ask.

“It doesn’t matter how clever you think you are or where you hide it in your house, if I have enough time, I would be able to find where you stash your valuables,” he said bluntly. He then explained that what was much more important than the actual place where you hide your valuables is that you understand a burglar’s motivations. Basically, he has two:

1. To steal your money and valuables
2. To get out of the house as quickly as possible with these goods

Aside from the useful, practical advice the interviews give, it’s also very interesting to see how your precious home looks from the perspective of someone breaking in.

[Click here for part 1]

[Click here for part 2]

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Header photograph by Christina Snyder

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The Automatic Millionaire by Dave Bach is a little book with one big idea: you are too lazy to budget. Instead of planning a budget, you should automatically deduct savings and retirement from your paycheck. According to The Automatic Millionaire, this is the most fool-proof way to build wealth, and you’ll live off of the remaining money more easily than you imagine.

The Automatic Millionaire is the book that brought the world ‘The Latte Factor’ — the idea that small, daily costs drain your money like leaches. To those unfamiliar with compound interest, the Latte Factor is shocking. Forgoing a $4 cup of coffee daily and instead investing the money, yields $263,000 after thirty years. Bach has a Latte Factor Calculator on his website where you can adjust the numbers to your situation.

Bach does a good job of stressing the importance of setting your financial system on autopilot in order to remove what is always the weakest and least reliable link in executing a plan: you. Internalizing this idea can mean the difference between retiring comfortably and working until you die.

While I liked the book, the style has a quality of breathless excitement that annoyed me. Rather than just tell the reader his ideas, Bach has a quasi-fictional couple from whom the author learned all his secrets relay their story instead. This wouldn’t be a problem except that Bach has a tin ear for the rhythm of a conversation.

Perhaps this is the teacher side of me flaring with anger, but the author repulsed me when he claimed not to be a ‘math whiz’. Sure, not everyone is Ramanujan but if you’re writing about finances, I expect better of you than to dismiss math skills with the rest of the hoi polloi

To increase the book from its natural, pamphlet size, Bach included lots of needless filler. Bizarrely this includes multipage lists of websites and their descriptions. One such list covered practically the entire international banking industry naming each company with a paragraph of services available online.

Still, the book is relatively short for the genre and can be easily read in an afternoon. One very nice feature is that Bach motivates the reader to take action immediately. Each chapter finishes with a clear and actionable checklist of things to do to set up your finances in accordance with the system.

Click here to buy a copy of The Automatic Millionaire

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Header photograph by OiMax

The median household in the United States spends 19% of their budget on transportation. However, in the suburbs, that cost can rise to more than 40% of the budget. Suddenly, the suburbs don’t look so cheap — living closer to the city center cuts your transportation costs but housing is more expensive. How does one find the cheapest overall cost of living? Fortunately, someone has made a map showing the total cost of living. From the blog post:

This map combines both housing and transportation costs. The result is maybe a bit surprising. In-city areas tend to look pretty good, while far-flung suburbs — where you get a lot of square footage (and lawnage) for your money — don’t look so good at all. It makes a little clearer the tradeoff between floor space and travel costs, which tend to be higher than buyers imagine.

This will be quite useful for when my wife and I move back to The States. Currently living in a big city with fantastic public transportation, it’s easy to forget how much cars cost.

[Click here to read ‘The True Cost of Suburban Housing’]

[Click here to see the maps]

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Header photograph by ulybug

Story via WorldChanging.com

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There is a big difference between ‘having a job’ and ‘working’.

People mix the two, they say they don’t want to work, but they really don’t want to have a job. A job is boring, tedious and pointless for so many reasons. Working is not. If someone else makes profit from your effort, you are jobbing, if you are the primary benefactor of your effort, you are working.

Jobs are necessary for companies to exist. Companies can only profit by paying their employees less than the amount they are worth. If a company employs computer programmers for $30,000 a year, then the average programmer must produce more than $30,000. The difference between the value the employes produce and their salary goes toward the profit of the company. (It’s difficult to measure the value of an individual employee so their efforts are averaged together. For this reason, if you have an entrepreneurial sprit, you may be better off on your own. For more on this, see the essays of Paul Graham)

Jobbing isn’t necessarily bad. If you produce less value than the average employee, having a job is the optimal strategy. If the value you produce is less than that which is necessary to support your life, then get a job. Jobs, depending on the field, can be less risky than working. Even for the highly productive, the company they work for may give them leverage. A scientist working for a research firm will have access to tools and equipment he would otherwise never get on his own. With these he can produce much more than he ever could alone.

Working is when you are the primary benefactor of your efforts. If you produce more value then you are rewarded more. I suspect that some of peoples’ frustration with jobs is from their efforts not equaling their reward. Even when extra contributions are rewarded they are usually done in a delayed and somewhat arbitrary way. If your employer thinks you will continue to produce increasing value for a constant salary, why would they increase your pay? Or, if you are in a strongly unionized field, pay raises are across the board or not at all. But this is what you trade for security.

If you open a store and you own it, there is tremendous incentive to grow the business because you are the benefactor of all that effort. I define working as when the benefit of your effort goes directly to you, and not an employer.

Jobbing is demoralizing because, deep down, you know that you either aren’t being fully rewarded for the work you do (and never can be) or you know that you’re slaking off and not living up to your potential.

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Header photograph by Todd Huffman

Forbes has a slideshow up about the cheap billionaires. These frugal men include Warren Buffett, who still lives in the house he bought in 1958, Jim Walton, who drives a pickup truck, and others.

[Click here to see the slideshow]

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Header photograph by EverJean

Story via boing boing

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I never realized how close to the edge I lived.

News stories would come to my attention with numbers like 66% of Americans live paycheck to paycheck. I would scoff at those people. I always had money in the bank an the end of the month. I wasn’t like them — until I realized I was.

I had a £1,000 ‘emergency’ fund and a couple of hundred pounds in my debit account. But my expenses were at least £1,600 and my monthly take-home pay was £1,800. The math told me I couldn’t last one month if my salary disappeared.

I lived paycheck to paycheck without knowing it.

Building up an emergency fund is an essential part of personal finance. It’s the buffer that allows you to run into short-term problems without catastrophe. Without an emergency fund, you are completely dependent on your employer and any unexpected expenses can derail your financial life.

The crazy survivalists understand the perils of depending on others: they stockpile months worth of food and supplies. If the flu strikes again, they don’t need the local supermarket for food, or the power company for electricity.

An emergency fund accomplishes the same thing: it diminishes the effect that the external world can have on you. It increases your freedom and your options,

How big of an emergency fund is necessary? Dave Ramsey, along with other financial experts recommend three to six months of expenses. If you have ultra-secure work, three months is fine. If your job is more risky, lean toward six months.

There is also psychological benefit to having a well-stocked emergency fund: less stress. An emergency fund is a financial shock absorber, it frees you from having to watch out for every bump in the road. If your boiler breaks or there is an unexpected medical expense, you don’t have to panic about where the money is going to come from, and you don’t need to use a credit card.

Cut your expense and try to build up your emergency fund today.

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Header photograph by Paul Keleher

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This Bizarro comic perfectly sums up the financial dangers you’d better be prepared for when getting married. Watch out for that lifestyle inflation!

[Click here to visit Bizarro’s website]

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Story via neatorama

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Unfortunately, I’ve suffered from being a naturally frugal person. I don’t make big purchases. I don’t have an expensive apartment filled with expensive clothes. Why do I say ‘suffer’? Because I’ve never been forced to track my spending. I’ve glided along under the impression I’m doing fine.

I feel fine, but what do I know? Science has shown, repeatedly, that people are woefully ignorant of their abilities. People who are the worst at a task often will self-rate their abilities the highest. Given this, I could easily be wasting significant amounts of money simply because I’m not paying attention to where it’s going, and overly confident in my natural frugality.

Currently, I keep vague track of my finances with a program called Moneydance. Here is a typical pie chart for a month’s spending:

Notice that big pink slice? The largest one after rent and tax? That’s the dreaded black hole of cash spending. Where does that money go? I have no idea. I have a sneaking suspicion that my fiscal irresponsibility hides in that wedge of the pie. To shine light in that darkness and root out any problems, I intend to track all my expenses for one month.

What I don’t intend to do is wildly change my spending habits. I want to get a baseline of spending activity to start building a reasonable budget on. Though I’m sure the attempt to perfectly capture a typical month will be somewhat marred by the dreaded Hawthorne Effect.

So, for this month, I’m tracking all of my spending and recording the results. I encourage you to do the same. Leave a comment if you’ll join me on this goal.

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Photograph by bachmont

On Point, an excellent current events podcast, recently did an episode on how to protect your investments from the falling value of the US dollar. From the show’s description:

It has been scary times for any American with two cents to invest and no idea where to put it. Stock markets — at home and abroad — way off their highs and who knows where the bottom is. Housing prices collapsing. Headlines full of crisis talk and emergency intervention. The pros say don’t panic, but some days that’s hard for a nation nursing IRAs and 401K nest eggs into an uncertain future. We need advice, and this hour we’re going to get it.

[Click here to listen to the show]

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