I think it was David Bach who coined the term “latte factor”, the term for how easy it is to piss away a lot of money by spending a little at a time, and I think he’s right. The clients I see who have the most assets to plan with are generally people who watch the small stuff. It’s a certain habit of mind that says Hold on to your dough. Think a long time before you dribble it away. And that habit tends to make people scrutinize purchases and eke out savings wherever they can. But people who focus on the latte factor can go wrong in two big ways.
The first way is sweating the small stuff and missing the big wins. Of course, if you’re not saving anything at all, you better do some sweating, and saving your lunch-and-Starbucks money is better than saving nothing at all, or even spending beyond what you make and ending up in the minus category. But I talk to too many people who would never buy anything full price, but never re-evaluate their car insurance, their cell phone bill, or even whether their Megahouse is really what they can afford. Cutting your car insurance in half, or buying term instead of whole life insurance can buy an awful lot of lattes. Ramit Sethi makes a lot of fun of the latte factor in favor of recommending the big wins, and I’m with him on that half.
The second way I see people go wrong is to save and save and save, then get rooked by some smarty-pants broker because they don’t really understand how to invest and some “Raymond Jones” invited them to a free fancy restaurant for lunch and called themselves a financial coach. Sure, they probably avoided individual stocks, but they sure got sold some expensive commissioned mutual funds or fancy “managed accounts” and they don’t have a clue what it cost them or what they actually bought. Here’s the truth—you’re going to pay for solid financial advice. Nobody helps you for free, just like few doctors or lawyers will work with you because you’re nice. Even fee-only planners have to eat and send their kids to college. But KNOW what you’re really paying. Even though you’ll have to write a check to a fee-only planner (it won’t be disguised in management fees, sales fees, wrap fees or whatever else the brokerage industry has cooked up) and gee, that hurts, it’s still going to be cheaper than the true cost of working with your friendly neighborhood broker. But even before you go to a fee-only planner, read something! There’s tons of free advice at NAPFA, Get Rich Slowly, Motley Fool or check out my list of recommended books. The best way to save yourself some money is come into my office already knowing something. You’ll benefit far more from advice you understand.