Self-made millionaire: Here's how giving up coffee can make you rich
Getting rich could be more possible than you think.
As self-made millionaire David Bach writes in his bestseller, "The Automatic Millionaire," "Regardless of the size of your paycheck, you probably already make enough money to become rich."
In fact, building wealth may boil down to simply eliminating your morning latte. "We all throw away too much of our hard-earned money on unnecessary 'little' expenditures without realizing how much they can add up to," Bach writes.
He calls this "the latte factor," and the basic idea is that if you ditch a $5 latte every morning — or any small luxury you indulge in on a regular basis like bottled water, fast food or soft drinks — you'd have quite a bit of money to contribute towards savings instead. Over the course of a few decades, that money could grow substantially, thanks to compound interest.
Bach ran the numbers to demonstrate just how much the little purchases matter. Say you cut out a $5 daily expense. That's $35 a week, or about $150 a month. If you invested that $150 a month, here's how much you'd wind up with over time, assuming a 10 percent annual return:
In one year: $1,885
In 10 years: $30,727
In 15 years: $62,171
In 30 years: $339,073
In 40 years: $948,611
If you invested $10 a day, or $300 a month, you'd wind up with $1.9 million in 40 years, assuming you get a 10 percent annual return and reinvest the dividends, Bach tells CNBC Make It. If you invested $20 a day, you'd have $3.8 million in 40 years.
"Don't get caught up on the rate of return," he adds. If you want to use a more conservative rate of return, like 5 or 6 percent, run your own numbers using Bach's latte factor calculator.
Focus on the big picture, though: "The key is not the return on the money as much as the amount of money that you're saving." After all, "you've got to find something you can give up to get up."
Writers who take issue with Bach's idea of "the latte factor" argue that it'll take more than giving up daily luxuries to save big or solve financial woes. Personal finance expert and author of "Pound Foolish" Helaine Olen points out that the bigger issue for most Americans is "the fixed costs, the things that are difficult to cut back on. Housing, health care, and education cost the average family 75 percent of their discretionary income in the 2000s."
Still, it can help you gain control over your finances to start small. As Bach says, "small wins add up."
To try this out, start by determining your "latte factor" by tracking your expenses for at least one day and seeing exactly where you spend your money. Next, cut back on that expense and direct those savings towards an investment account, where your money will compound over time.
"You've got to start somewhere and $5 a day is a great place to start," Bach tells Make It. "Ideally, I want you save more: $10, $20 dollars a day. That can change your life."
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