Sunday, April 29, 2012

A few lines concerning the fallacy of the "latte millionaire theory"

You may have heard of the "latte millionaire" theory (the above image is not mine, by the way, but I do salute the brilliance of whoever originated it). I am writing to formally place on the record my opinion that there's a major flaw with this theory.

The underlying notion has probably been expressed by many people many different ways, but the latte-centric formulation of it was made by a guy named David Bach in his book "The Automatic Millionaire". The mathematical logic of it, as far as it goes, is impeccable. Let's say you buy a $3 latte every workday. If, instead, you saved that daily three dollars, it would total $3 x 5 days a week x 52 weeks=$780 a year. Over 35 years, that would be $27,300, which is not too shabby. Now, if, on top of that, you invested your saved $780 a year in the stock market, and received an average 10% return a year, the amount you save each year compounds over 35 years, and by the end of the period you would have $211,399. By forgoing a frivolous expense that you hardly even notice on a daily basis, you've made yourself wealthy by retirement. There's just one problem with this idea:

Under this formulation, you don't get to have a latte for 35 years. Let's say you start it when you're 30. You won't have a latte again until you're 65!

Don't get me wrong. I understand the wisdom of planning and saving for the future. I certainly understand  the idea of delaying immediate gratification for longer term gain. And yes, you could make your lattes at home and bring them, or have the office coffee. But part of the joy of life is splurging for an occasional latte, making a normal work day just a little bit frothier and more magical.

I also understand that the idea is not about latte and is, in a way, a metaphor. And that's where my real objection lies. Yes, it's a good idea to keep track of impulse and splurge spending, to not be doing it all the time. And granted, as it is a whole lot of us have not only not been saving, but have been buying things with borrowed money, hence our current collective economic dilemma. A pinch of the "latte millionaire" idea would be a good antidote to that.

But the larger idea of delaying gratification for decades, saving up not just our money but our experiences of joy for retirement, threatens to impoverish the decades in-between. And I wonder if this sense of joy poverty is in itself something that fuels our urge to splurge. Could more living for today, in a balanced, engaged way, actually lead to less urge to buy on credit and more saving for the future at the same time? Call me a dreamer...

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