Become a Millionaire – The Latte Factor by David Bach – Part 1 of 2

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Most people think that the quickest way to become rich is to increase their income as quickly as possible. Though this is important, it is not necessarily the first step you need to take in becoming wealthy. In his book: The Automatic Millionaire, best-selling author David Bach describes something he calls the latte factor. If you have any intention of understanding your money, or simply want to just manage your money better, you need to understand what the latte factor is. This one simple concept could literally change your life. Before we learn about the latte factor, there are a few basics we need to first cover.

“The problem is not how much we earn, it’s how much we spend!” Says David. Ask anyone who got a raise last year if their savings increased. Almost all of them will say no. It is truly an amazing thing. David points out that: “the more we make the more we tend to spend”. I would always tell my clients, It doesn’t matter if you make $30, 000 a year and spend $50, 000 or you make $80, 000 a year and spend $100, 000. Broke is broke. There is hope though, there are things you can do to improve your situation.

“How much you earn has almost no bearing on whether or not you can build wealth”. Says David. “If you want to build wealth, or do well financially, it’s a matter of watching the small stuff. Like the little spending habits you could do without”. Don’t feel bad. If you are like most people you’re probably living paycheque-to-paycheque. Spending your Christmas bonus before it’s even in, and making sure that every penny that comes in, goes out in some way or another. This is called the rat race, and this is what it looks like:

GO TO WORK————MAKE MONEY————SPEND MONEY

If something in this cycle does not change, you almost certainly doom yourself to a life of work. Seem unfair? It is, and this is why hard working people can find themselves working for 20 years and are no further ahead then when they started. It’s a vicious cycle, and I suggest you get out of it as soon as possible.

Ok, the good news. There are several things you can do to get out of this cycle. The first thing you need to do is find out if you are spending more than you make. This is called cash flow, or to put it literally, the flow of cash. I found it amazing that almost all the clients I sat across from had no idea what their cash flow situation was. (You can get your free budget software that I created here. All you need to do with this template is fill in the green spaces and everything else will automatically calculate for you.) The second thing you need to learn is the latte factor. In post 2 of this series I will cover, in detail, David’s concept of the latte factor and what it means to you.

Remember, there are always things you can do to improve your finances. It does not matter how much you make, broke is broke. The first step to get out of the rat race is to understand your cash flow. Are you spending more than you make? You can use the free budget spreadsheet to find out. Stay tuned for the second post about the latte factor.

Reference: The Automatic Millionaire by: David Bach

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