by David Bach
Viewed in this light, my goal of buying a house in Tahoe in the next three years doesn’t make a lot of sense. And indeed, after discussing it thoroughly, Michelle and I agreed that my dream of owning a second home would have to wait. Right now, we needed to focus on our goal and dream of traveling.
It never ceases to amaze me how many couples don’t set goals together or share their dreams with each other. What’s the point of being with someone if we don’t share our most intimate dreams and thoughts with them? Some people, of course, have partners who aren’t supportive, partners whose dreams and goals are so different from their own that they just can’t get together on them. If that’s your situation, you’ve got a problem—a problem this book can’t solve. Fortunately, most people who tell me their spouses or significant others don’t support them aren’t really in that fix. They’re just not giving their partners enough credit.
So don’t keep your top five goals to yourself. Share them with your partner. If you’ve got kids, share your dreams with them, too. Ask them what they’d like to see the family doing over the next three years. Ask them about their values, and then work together on a family list of five things that you all want to accomplish together. Nothing brings a family closer than planning major goals together. By discussing our goals, values, and dreams with each other, Michelle and I began the process of creating our future together. You can do the same thing with your family.
Okay, enough talk about the tools. It’s time to go to work and set some goals.
LET’S GET STARTED!
Use the Purpose-Focused Financial Plan worksheet that follows to get yourself thinking about what five key things you would like to accomplish over the next 12 months. Remember, you want these goals to be specific and measurable—things like paying off your credit-card debt or saving up the down payment for a house. In the back of the book, you’ll find two additional worksheets—one for your partner, the other for the two of you to fill out together as a couple.
While you are thinking about the five key things you’d like to accomplish in the next 12 months, your partner should be doing the same with his or her goals. Once both of you have finished, sit down together and use the third worksheet to figure out your goals as a couple.
To put yourself in the right frame of mind to define your goals, use what I call the Clarity Question. It’s exactly what I ask in my seminars to get my students to get started on their action plans.
“Twelve months from now, what five specific things would you need to have accomplished in order to feel you have made great financial progress in your life?”
PURPOSE-FOCUSED FINANCIAL PLAN™
Designing a Proactive Year
The goal of a Purpose-Focused Financial Plan is to write down what you are going to focus your energy on in the next 12 months. To do this, follow the six steps below and fill in the worksheet on the following page:
List your top five values. Ideally you already did this in Step Two, when we covered the concept of creating your Value Circle. Remember you are writing down values first to address the issue of who you want to “be” as a person.
Based on your top five values, write down specifically what you want to “do.” Your top five “to do’s” will be your top five goals for the next 12 months.
Now it is time to make these goals specific and measurable. Remember, the more detailed and provable, the better.
In the fourth box on the next page, it’s time to hit the “action plan” hard. What action can you take in the next 48 hours to move toward your goals? Remember that “I don’t know” is not acceptable. The answer to “I don’t know” is…“I know you don’t but if you did, what would you do in the next 48 hours to get moving?”
Whom are you going to go to for help? Be specific. You will need help if your goal is big and worth going for. In this box, write in the name of the person who could help you reach your goal.
When are you going to start and when is your deadline to finish?
CONGRATULATIONS!
Before we move on to the next step, I want to congratulate you for reading this far and hopefully playing “full out.” All too often, when people buy investment books, they want to head straight to the “facts”: How do I invest? What mutual funds should I buy? Am I doing the right thing with my insurance? And so on.
All these things are important, but this book is about more than the basics of investing. It’s also about the basics of life-planning. I hope the last two steps really got you thinking about your life. Now it’s time to head toward the “specifics”—namely, how exactly are you going to make more money and invest it more wisely so you can finish rich?
* * *
*I once saw a TV news report about how mortgage companies regularly make mistakes, so I went back and checked my mortgage statements. Sure enough, I discovered that 8 out of my past 12 monthly mortgage statements were inaccurate! It took me months to get my account corrected. Learn from my experience. Don’t ever file your monthly mortgage statement without opening it. Make sure you always give these statements a close inspection!
STEP 4
THE COUPLES’
LATTE FACTOR®
THE PROBLEM IS NOT OUR INCOME…IT’S WHAT WE SPEND!
If you remember only one thing from this book, it should be the sentence above. The reality of life is that just about everyone in America makes enough money to be wealthy. So why aren’t we all rich? The problem isn’t our income; it’s what we spend.
What do most Americans do with their hard-earned money? They waste a lot of it. That’s right—they simply waste a lot of it every day on “small things.” I put that phrase in quotes because, as we shall see, it is quite misleading. So-called small things can add up very quickly to some amazingly large amounts.
In this, the fourth step of your journey to becoming a Smart Couple who finishes rich, you are going to learn how anyone can become wealthy on practically any income. In the process, you’re also going to learn to appreciate the power of your money and the importance of the wealth for which you work so hard.
Most of us don’t really think about how we spend our money—or if we do, we focus solely on the big items. At the same time, we ignore the small but steady expenses that drain away our cash. We don’t think about what it cost us to earn our money, and we don’t realize how much wealth we could have if, instead of wasting it, we invested it. By understanding what I call the Couples’ Latte Factor, you’re going to change all that. The point is, you work hard for your money, and your money should work just as hard for you!
AMERICANS HAVE A SPENDING PROBLEM
I know you don’t have a spending problem, do you? But trust me on this—if you don’t, your friends and neighbors probably do. The fact is, U.S. consumer debt is at record highs, currently approaching $1 billion! About one million people a year declare bankruptcy in America. It’s almost patriotic to spend yourself into poverty.
It’s not hard to figure out why so many people have been going broke. These days you can buy just about anything without actually having to pay for it…at least not until later. You can go to a furniture store and decorate your whole house, and the nice people there won’t bill you for 18 months. Or maybe you want a new car or a boat, or both. No problem. You just go to the showroom, smile, and “ka-ching”—you’ve got yourself a brand-spanking-new BMW or Mercedes with low monthly payments. You would think the recession and mortgage crisis we lived through would have changed this, but it hasn’t. Student loans, as I write this, are now approaching $1.4 billion, and car loans are also at a record high of $1.2 billion.
With all these opportunities—all these temptations—all over the place, who wouldn’t give in? Gosh darn it, we’re working hard. The world is a tough place. We deserve nice stuff. Not only that, but we deserve it now! Forget about saving. Give me my stuff today. FedEx me my stuff. And, oh yeah, while we’re at it, make sure to put it on the credit card that gives us frequent-flyer points. Don’t they have some sort of sp
ecial promotion this month where we can earn extra miles? Maybe we should spend a little more and get a little more stuff.
Now if you think I’m starting to sound a little silly here, you’re right—this is silly. But does it sound at all familiar? Do you know these people? Maybe intimately?
Okay, not everyone is that bad. Not everyone is out there leasing a new BMW every two years. You’re probably not. But does that mean you should pat yourself on the back? Not necessarily.
All too often, being careful about the big things makes us feel as if we can afford to forget about the little things. We don’t like to admit it, but it’s true. There’s a tendency to say to ourselves, “I’m not wasteful with my money, but gosh darn it, I should at least be able to buy myself a nice cup of coffee and a bagel in the morning. I ought to at least be able to rent a few videos tonight and pick up a pizza. Five dollars here and five dollars there isn’t such a big deal, is it?”
Well, maybe it is. Maybe $5 here and there can become a million-dollar deal if you invest it right.
Got your attention, didn’t I? Well, I’m not exaggerating. It’s true. There is a simple and sure way of turning your small savings of $5 here and $5 there into big results. It’s so simple, in fact, that I can sum it up in just three words—three critical words in a Smart Couple’s vocabulary. They are…The Latte Factor.
THE COUPLES’ LATTE FACTOR®
What’s a Latte Factor? The Latte Factor is a simple concept that evolved from a seminar I did where a couple suggested to me that they simply did not have $5 to $10 a day to save for retirement. What we learned over the course of a conversation was that this couple actually had more than enough income to become wealthy. As I said in the beginning of this chapter, the problem wasn’t their income, it was what they were spending. The best way to explain this powerful yet simple concept is to share with you their story.
JIM AND SUSIE LEARN ABOUT THE COUPLES’ LATTE FACTOR
At one of my financial-management seminars, a guy named Jim stood up at the end of the third day of a three-day class and in a few words nearly wiped out nine hours of teaching on my part.
Jim was in his mid-thirties. He had come to the class with his wife, Susie. “David,” he said, “your class has been great, and your stories are cute, and your idea about putting your money into a retirement plan makes sense. But in the real world, it just won’t work. You talk about putting aside $5 or $10 a day like it’s no big deal. In the real world, we don’t have an extra $10 a day to save. In the real world, we live paycheck to paycheck. In the real world, we’re broke.”
Completely deflated, I looked at him in disbelief. My financial-advisor brain thought, “You’ve got to be kidding. Everyone can manage to save $10 a day.”
But then I looked around the room and noticed that a lot of people were nodding in agreement with what Jim had just said. They, too, were feeling like there was no way they could save an extra $10 a day.
Was I wrong? Was it completely unrealistic to think that everyone could find an extra $10 a day to put into a retirement account? There was only one way to find out. I turned back to Jim and asked him to take me through a typical day of his and tell me how he spent his money.
“Let’s start in the morning,” I said. “Before you go to work, do you drink coffee?”
Jim looked around nervously, as if I’d asked him a trick question. “Well, yes,” he finally said.
“Great,” I replied. “Where do you get it? Do you make it at home or do you get it at work for free?”
Jim shifted in his chair and glanced at Susie, who was sitting next to him. “We get our coffee on the way to work,” he said.
“Oh, really? You both get coffee together on the way to work? Well, that’s nice. Do you go somewhere fancy to get this coffee?”
Before Jim could answer, his wife spoke up. “Of course not,” she exclaimed. “We go to Starbucks!”
The class cracked up.
“Right,” I said. “Nothing fancy. Just Starbucks. So what do you get at Starbucks?”
It turned out they both got Grande nonfat lattes.
“Very good,” I said. “And how much do these nonfat lattes at this non-fancy coffee shop cost you each morning?”
Jim looked at Susie. As far as he was concerned, this was her show now.
She said the lattes totaled about $7.
“And do you get anything to eat with them?” I asked.
“Well, usually we get a bagel or a muffin,” Susie replied.
“And what does that cost?”
“Well, the muffins usually cost about $2.50 each. So, I guess that’s $5.00.
“Five bucks, for muffins?” I asked.
Susie said, “Well, they are nonfat muffins!”
“Oh, that explains it,” I said. Okay, let’s add this all up. Six bucks for two lattes. Three-fifty for the nonfat muffins. So we’re at almost $10 between the two of you, and you haven’t even gotten to work yet. Interesting.”
In the next several minutes we went through the rest of Jim’s and Susie’s day. As they listed each expenditure, I wrote it on the chalkboard. Here’s what their daily spending habits look like:
Jim
Double nonfat latte: $3.50
Nonfat muffin: $2.50
Candy bar and a Coke before noon: $2.00
Lunch (usually a burrito, chips, and a Coke): $12.00
Parking per day: $15.00
Total: $35.00
Susie
Double nonfat latte: $3.50
Nonfat muffin: $2.50
Juice and protein bar with friends before noon: $6.25
Lunch (usually a salad and an iced tea): $12.50
A double latte around 3 p.m.: $5.50
Take-out dinner for her, Jim, and the kids: $35.00
Total: $65.25
Total for Day: $100.25
When I added it all up, the total came to $100.25. Figuring in the sales taxes, Jim and Susie were spending more than $110 a day—all on so-called little stuff!
By this point, the rest of the class was looking at them as if they were the worst kind of spendthrifts imaginable. But you know what? There were at least six other people in this class with fancy cups of coffee in their hands! They were sipping and laughing at the same time.
Now the point here is not that you should stop drinking coffee or even stop going to fancy places like Starbucks. I happen to enjoy Starbucks myself. The point is that here we had a typical couple who thought they couldn’t afford to save any money, and yet there they were spending more than $110 on what were really extravagances.
Of course, when I suggested this to Jim and Susie, their first reaction was to get mad. “What do you mean, extravagances?” Jim questioned. “Since when is morning coffee and lunch an extravagance?”
“Calm down,” I replied. “No one wants you two to starve to death. But what if you made your own coffee at home and ate an apple instead of buying a muffin? Instead of spending $10 at Starbucks, my guess is that it would cost you about 50 cents a day. You might also think about bringing your lunch to work a few times a week.”
By this point Jim looked as if he couldn’t decide whether to punch me out or thank me.
“Look,” I continued, “my point isn’t to criticize how you and your wife live. My point is that if the two of you really took a hard look at how you handle your money, I know you could each find at least $10 a day that you could be saving instead of spending.”
What finally clinched it was when I explained how much that $10 a day could be worth to them. The math is really quite amazing. Saving just $10 a day amounts to roughly $300 a month, or $3,600 a year. If Jim and Susie (who were both in their mid-thirties) each put that much into a pretax retirement account that earned an annual return of 10 percent, by the time they were 65 they’d have a combined nest egg of more than $1.1 million! The exact figure is $1,184,356.
As I finished scribbling the figures on the chalkboard, both Jim and Susie looked at me and then stared at each o
ther. Finally Susie said, “David, are you trying to tell us that our lattes could wind up costing us $1,184,356?”
The class laughed, but Susie had it exactly right. By the way, had they started in their mid-twenties, they could have had $3,186,666. “That can’t be right!” you protest. But it is. That’s the miracle of compound interest in the fourth decade. Want to run these numbers yourself, or change the percentage? Use the same free calculator I used to run this at www.investor.gov (search for “calculators”). For these specific calculations we ran the returns annually.
SOCIETY IS NOW DESIGNED TO HELP YOU “LATTE” AWAY YOUR FUTURE
There’s a reason so many of us “latte” away our futures. It’s that it’s so easy. You can’t go two blocks in any city or town in America without coming across a fast-food restaurant or a juice bar or a fancy place to have a fancy cup of coffee. Stop in any one of them on a regular basis and you can easily wind up spending $5 a day. Drink just two Cokes a day, and that’s $2. And I haven’t even touched on things like cigarettes, which can cost people $8 a day (In New York City, where I live, it’s $13!), or stopping by the bar for an after-work cocktail and quickly dropping an additional $10 to $20 a day or more ( a martini in NYC can run you $25, easily).
There’s no getting around it. Money is easy to waste. It’s especially easy to waste on the small stuff. That’s what the Latte Factor is all about. It’s simply a metaphor for all the small amounts of money we spend on little things. The challenge is that the small stuff adds up—and before you know it, you’ve cost yourself millions.