Automatic Millionaire – The Latte Factor
Several years ago I read a book called “The Automatic Millionaire” by David Bach. I was perusing Barnes & Noble, drinking my daily iced mocha, and I thought, “Automatic? I’m listening.” I wish I never read it, because there was a chapter that affected my life choices negatively for a few years, called “The Latte Factor.”
Best-selling self-help books tend to have principles with catchy titles like “The Latte Factor” or “The Hammer Effect.” If I write a self-help book I will have a chapter called the “The Explosion Component” The basic principle of Bach’s “Latte Factor” is that you can compound large amounts of money, by saving just a little each day, and his example is the Starbucks latte. In summary, if you buy a daily latte at Starbucks, that’s four dollars each day. If you instead save that $4, the savings add up:
1 year of saving $4 per day = $1460
10 years = $14,600
40 years = $58,200
But then he blows your mind, by adding interest. Take those same daily savings, and put them in a standard stock market index fund, with a standard 10% annual return (you can tell his numbers were based on the growth economy days). Now let’s look at the new numbers:
$4 per day with 10% interest over 1 year = $1606 (no biggie)
$4 per day with 10% interest over 10 years = $25,595.50 (that’s some real savings!)
$4 per day with 10% interest over 40 years = $710,803.64 (EXPLOSION COMPONENT!!)
You mean to tell me David Bach, that if I eliminate mochas (I don’t drink lattes), that I’ll have seven hundred large? Well that’s a no-brainer – no more Mochas for me, no way Jose! (Jose is a Spanish double-pun, because my name is Joe, and coffee is also called Joe… get it?). I don’t even need to have a job, I’ll just not drink mochas! That’s a sacrifice I’m willing to make.
I read “The Latte Factor” in 2006, which gave me just enough time to save up some Mocha money before the greatest stock market crash since the great depression (thanks a lot Bach, you son of a bitch!).
For one year, I eliminated iced mochas. For an entire year, I erased that little happy slice of my morning pie. You know the part of the morning, that you look forward to? The thing is, I really like mochas. Without them, I’m sluggish, curmudgeonly, and fog-brained. If I ever seem aggravated, it’s probably because I haven’t had an iced mocha in the past eight hours.
And that’s where the logic behind David Bach’s “Latte Factor” begins to unravel. That is, a Latte (or in my case a Mocha) does have “value.” That value differs from one individual to the next, but Starbucks has placed that value at four dollars, and I would say they’ve done a good job with that number, given the massive success of Starbucks. In Bach’s teachings, he ignores that small purchases also have small values. If you sacrifice those purchases, you may also be losing little values that will also add up over time.
How rich is an individual, if he or she is not buying what shem desires? (Writing “he or she” for the sake of avoiding sexism is wordy, so “shem” shall be the new neutral). Forget millions, if you just cut out food and beverage altogether, you’ll have billions! And just think how rich you’ll be if you give up shelter! I could spend the next forty years homeless and starving, and make the Forbes 400 by 2051. People would go, “Wait a minute, that old decrepid homeless guy is worth twenty billion dollars? And I’d be like, “Booya.” And then they’d ask me for money, and I’d say “No way Jose!” because I’ve trained myself over a life time to have complete financial discipline – no shelter, no food, no mochas, no NOTHING! Let alone donating to some stranger who has wasted their money on things that are important to them! And then I would climb back into my dumpster and take a rich person nap.
You could have an enormous sum in your bank account, but if you’re living a destitute lifestyle, then what’s the point? Money by itself is only worth what it can buy, so by not buying what you want, you might as well not have money. Therefore, if you want to buy a Latte, but then you don’t, I submit that you are more broke with the four bucks still in your hand. You can’t drink four dollars David Bach! Even with interest, it’s not like you can have a 1000 mochas in forty years and make up the joy. That would simply be too much caffeine and dairy for one sitting.
Furthermore, forty years is a long-ass time. I’ve been living for a while now, but in my entire lifetime, I’m still not even 75% of the way to 40 (I’ll be 75% in a month so feel free to send gift packages to my Facebook wall). So you’re asking me to cut out my happy thing, for a longer period of time than I can comprehend, so that at the end of that incomprehensible amount of time, I can have an extra zero in my bank account? Sounds like a sad way to live.
Even the money pile is less impressive when you factor in inflation. $700K in forty years will be about $200K in today’s money, and that’s if our economy stays healthy. If our economy goes Africa, that $700K could turn into eighteen dollars in a hurry. And by 2051 a Mocha could cost $45. That’s if you’re even alive in forty years and if there hasn’t been an apocalypse.
The Automatic Millionaire is telling people that in order to be wealthy, you need to delay joy, which should be enough to make it a bad book. But I would argue that deleting my Mocha, not only decreases joy, but also decreases wealth. Yes, you read that correctly BACH! The Latte Factor detracts from both spiritual wealth AND literal wealth.
I estimate that I am 20% more productive when I drink a mocha. I’ll even be conservative and call it 15%. Americans with four-year degrees average 40K per year. If that individual increases their value by 15%, that’s an extra $6000 per year in productivity.
We will then need to subtract the cost of purchasing the mochas, which we learned earlier was $1460
$6000 – $1460 = $4540. Therefore, by buying my “latte”, I net gain $4540 over the course of a year, which averages out to $12.43 per day.
Now I will do your calculator again Bach, using my conservative constants, and I’ll round down to $12.
10% annual interest return of a daily twelve dollar savings:
1 year – $4818
10 years – 76,786.51
40 years – $2,132,410.93
Read it and weep Bach! Your Latte Factor just lost me 1.4 Million dollars! You should have titled your book, “How to be just like Scrooge, and broke too!” Even the subtitle is “FINISH RICH.” Run that marathon in total pain, so that right after you cross the finish line, you get to eat three bagels really fast. Sure they taste great, but that’s mainly because your body was in starvation mode. What if you didn’t even need to feel crappy that whole time? You could have just strolled. Actually, you could have laid on the couch and watched other people run on ESPN, and ate all the bagels you wanted. Forget bagels, you could have had chips and salsa!
What’s that, you’re still determined to be financially disciplined and retire a millionaire? Then here’s my final question, at what point do you get to start spending? Is it once you hit the million? The problem is, if a millionaire spends one dollar, shem is back down to $999,999. And you’re not going to disgrace yourself by sinking back into six digit territory, are you? So guess what, you better keep saving. Even when you’re old and rich, you still don’t get your Latte you old Scrooge! Besides, you’ve gone forty years without one, why change your habits now? Then you’re on your deathbed, and you realize all that money is going to your spoiled grand kids. The same grand kids who don’t wipe their shoes on your doormat, and call you “Grinch-pa” because you always put fruit in their christmas stockings. Now those little bastards are going to inherit your nest egg, and blow it all on gambling and cocaine. Eventually they’ll get on the wagon and take jobs in investment banking, because they know a guy, but there will certainly be some relapses and insider trading down the road. Is that what you want? You only gave them fruit because you knew what the sugar does to their teeth, and you’re trying to save them some money on dental bills!
That’s if you even have grandkids. What if you would have met your soul-mate at a coffee shop? Shem would be reading William Butler Yeats, or Twilight-New Moon, whilst sipping a pumpkin spice latte (still four dollars). But you didn’t meet your soul mate that autumn, because you were committed to a militant, latte-less lifestyle of thrift. And now you’re all alone, with your money pile, and even your money pile isn’t a real pile – it’s just a number on a computer screen (probably an old Dell because a Mac seemed too pricy). You can only check it online, when your WiFi’s working (which it’s usually not, because you bum your neighbor’s WiFi). Is that the life you want for us BACH? We can’t even see our million dollars because the neighbor’s WiFi is down again!
And that’s when you have a heart attack, yelling at your frozen computer, and right as you’re having the heart attack, your Bank of America account finally pops open, only to reveal a new ten-dollar maintenance fee, and your number has fallen to $999,990, and then you have a stroke on top of your heart attack, as cancer sets in. And as you slip away from this life, the last words out of your mouth are “iced-mocha”, as you flash back through your life and remember a happier time. A guy in a top-hat will wonder what you meant by “iced mocha” and conclude, “I guess iced-mocha is just a piece in a jig-saw puzzle…a missing piece” and then hidden away is a picture of you, sipping an iced mocha when you were just a kid with a smile on your face, and some guy tosses the picture into a raging fire, and black smoke billows up…or whatever else I need to write to indicate a reference to Citizen Kane.
You may be thinking this is just a desperate attempt to justify my addiction to an iced mocha – and sure that beverage involves a perfect combination of espresso, chocolate sauce, whole milk, and whipped cream (with chocolate drizzle on top, and my name written on the cup)…and yes, it would certainly be nice to finally have a guilt-free mocha experience to start my damn day Bach! It’s also true that I have not done this much math since Ms. Clingman’s 10th grade Algebra class (who I would wager drank Folger’s each morning with a frown on her face). But I will say, this math would not have been possible today without that iced mocha, and what would the world be without this blog? Most likely, it would be an emptier world, with one less blog.
So there you have it, that’s my rebuttal to “The Automatic Millionaire,” five years after reading it. Buy the things you want with the money you have.
Here is a link to David Bach’s Latte Factor calculator if you want to plug in your own figures and finish rich!