Entering the working world is particularly harsh nowadays, and twenty-somethings trying to juggle their student loan debt, possible credit card debt, and low wages understandably feel discouraged and exhausted. While debt can become isolating, it’s important to remember that you’re not alone, and The Latte Factor (available May 7), by best-selling author David Bach is the perfect companion for those struggling to make ends meet.
We had the honor of chatting with author David Bach about The Latte Factor, and he offered some additional financial wisdom for people young and old trying to manage their money.
Wise Bread: David, THE LATTE FACTOR, Why You Don’t Have To Be Rich To Live Rich is your 13th book. You’ve written nine consecutive New York Times best-sellers, including your most popular book, The Automatic Millionaire, which spent nearly a decade on the best-seller list. You have over 7 million books in print. Why this book now? Also, THE LATTE FACTOR is written as a parable. What made you, for the first time ever, want to write a story-based book?
David Bach: I’ve been wanting to write this book for well over a decade, ever since I went on The Oprah Winfrey Show with The Automatic Millionaire and shared the power of the latte factor on her stage. Since then, I’ve wanted to put out a short book that told a story people could read in 90 minutes to learn the most important principles about money.
I’ve always been inspired by parables and short books that are easy to read. One great example is The Alchemist by Paulo Coelho, which is one of the greatest books ever written. Other examples include Who Moved My Cheese by Spencer Johnson, who also wrote The One Minute Managerwith Kenneth Blanchard. Those books have touched tens of millions of people all over the world. That’s my goal with The Latte Factor.
I want this book to inspire the 98 percent of people around the world who want to be smarter with their money, who want to buy their financial freedom, but because they’re living paycheck to paycheck, they don’t know where to start. I want this book to reach the 98 percent of people who wouldn’t normally read a book about money. Even though I’ve sold 7 million books, I know I haven’t even scratched the surface of reaching the number of people who need to be reached. I believe this book, in particular, will connect with the 100 million young people in this country who are Millennials and Generation Z. These young people want to live the American dream, but many are starting to lose hope.
Don’t get me wrong, this book also applies to the Baby Boomers. But I believe a lot of Baby Boomers will buy this book for themselves and then turn around and give it to their children and grandchildren because they know it’s so much easier to become financially free when you start young. The number one thing people always say to me is, “I wish I had known how to do this when I was younger.” I think this book will be a popular gift, especially around graduation time, and it’s written in such a way that even a teenager could understand the important financial lessons that are being communicated.
WB: The Latte Factor comes out on May 7. Before it’s even been released, what are some things that excite you about this book and its potential?
DB: As a matter of fact, the greatest personal satisfaction for me with this book has already happened, and that is I got my 15-year-old son, Jack, to read it. Keep in mind, he’s never read any of my other books because he’s not interested in them yet. Since The Latte Factor is a story, he gave it a shot and ended up reading it cover to cover in two days. When he finished it, he turned to me and said two things, the first of which was, “Dad, is this real?” He was pointing to a chart in the book that showed how a young person could have over $1 million by the age of 65 if they started saving at age 19.
I told him it was real thanks to the miracle of compound interest. His next question was, “When do I pay taxes on it?” I explained that with a traditional IRA account, he wouldn’t have to pay taxes on the money until he took it out. His eyes lit up at that point, and he asked, “How do I get one of these accounts? I can have way more than that because I’ll be starting at 15, not 19.” So, at age 15, my son is asking all the right questions and he’s motivated to be financially free because of this book. That’s a huge victory.
Another thing to know about this book is that it’s not just about money, which is where the second victory comes in for me. You see, this book is also about going after your dreams and the need to take risks to reach your dreams. When I asked my son the biggest takeaway he got from reading the book, he said, ‘When I got to the end of the book and read the story about your grandmother, I really thought about my life. I realized I’m going to need to take risks in life to go for my dreams.”
We recently decided to move to Florence, Italy, as a family. I gave my son the choice to come with us and he decided he would. Here’s what he said about that decision after reading the book: “I realized that not only was going to Florence the right decision, but it was really the right decision. If I had decided not to go with you, I think I would look back on my life later and my biggest regret would be not taking the risk to move to Florence.”
That blew me away. If my 15-year-old son can come away with those two lessons, I’ve achieved everything I wanted to achieve with this book. If this little book can do that for thousands, maybe even millions of other people, it’s just going to be incredible.
WB: Can you explain the latte factor for those who aren’t familiar with it?
DB: The latte factor is a phrase that has gone all over the world and impacted millions of people. I’ve talked about it in all of my books and shared it everywhere from Oprah to NBC, CNBC, CNN, Fox, and CBS. Everywhere I’ve gone and in every speech I’ve ever done, I talked about the latte factor. Here’s why: The latte factor wakes people up to the fact that you don’t have to be rich to live rich, which is the subtitle of the book. The latte factor shows you that small amounts of money can truly change your life.
When I first started teaching the latte factor, I told the story of a young woman named Kim, who worked at The Gap and didn’t believe she had the money to save. I showed her that by going through her expenses and cutting out her latte, muffin, and some snacks she was eating before lunch, she could save $10 a day. If she invested that $10 instead of spending it, she could be a multimillionaire by the time she retired. That little story went viral as I shared it over and over again all over the world. It woke people up to the fact that, in all likelihood, they do have the money to start saving.
Again, the key is that small amounts of money can change your life. Starting with $5 a day may not seem like a lot, but if you combine that savings with 10 percent annual interest, you’d have $948,611 40 years later. That’s the power of the latte factor.
WB: How does the latte factor play into the story you tell in the book?
DB: Throughout the book, you follow the journey of Zoey Daniels as she learns all these important financial lessons. Zoey is 27 years old, she lives in Brooklyn, and has a dream job working in the Freedom Tower as an editor for a travel magazine. It’s exactly what she wanted to do with her life when she moved to New York and yet, when the story picks up, Zoey is stressed out because she’s not getting ahead. Even though she’s gotten raises at work, she’s still living paycheck to paycheck. Like so many young people, she’s beginning to lose hope that she can live the American dream.
One day, as she’s coming out of the subway station at the Fulton Center and walking through the Oculus, she sees a message displayed on a massive LED screen:
If you don’t know where you’re going, you might not like where you end up.
Seeing this phrase starts her on a journey of questioning the path her life is on, which is something that many of us do. We stop and wonder where our lives are going. As she begins to share her pain with others, her boss introduces her to a mentor named Henry who works as a barista at the coffee shop Zoey stops by every morning for her latte and muffin. Henry takes Zoey by the hand and begins to teach her some principles of life that she needs to learn in order to really go after her dreams. Through these mentors and the lessons they teach — including the latte factor — Zoey begins to realize she’s richer than she thinks, she’s stronger than she knows, and that her dreams deserve to come true. We watch Zoey go from lacking confidence and hope for her life to putting in place a system where she begins to create financial freedom.
It’s an incredibly uplifting, inspirational story that also tugs on your heartstrings. We have a couple thousand people on our Latte Factor Insider Team who received preview copies of the book and the initial reviews have been off the charts. A lot of people have told us the book made them realize there’s so much more they can do with their lives, but they have to go for it. Wherever you are in life, if you’re living paycheck to paycheck, you’re behind on your retirement plan, or you simply want to wake up the dreams that have become buried in the background of your busy life, this book will give you the direction, the hope, and the road map to focus on what matters most to you.
WB: David, you’re also known for the phrase “pay yourself first.” Can you talk about what that means and share with us the way you look at that?
DB: The three most important words you could ever hear when it comes to personal finance are “pay yourself first.” That’s the way ordinary people with ordinary incomes all over the world become millionaires: they pay themselves first.
Before we get into what it means to pay yourself first and where the money should go, I want to share some startling statistics. The average American is going to work over 90,000 hours in their lifetime, and unfortunately for most Americans, they’re going to have nothing to show for it financially. According to the Federal Reserve, nearly half of Americans can’t get their hands on $400 for emergency purposes.
According to GOBanking, 66 percent of Americans can’t get their hands on $1,000 in case of an emergency. Seven out of 10 working men are living paycheck to paycheck, as are eight out of 10 working women. The average American has just six days of expenses set aside. We have to do something to fix this. What we should be doing is teaching our kids about money in middle school and high school, but until then, my hope is The Latte Factor will provide young people with a financial education.
So, what does it mean to pay yourself first? It means you have to get financially selfish and set yourself up so that you’re the first person paid when you earn a paycheck. I recommend at a minimum that you save the first hour a day of your income and have it moved automatically from your paycheck into a retirement account. If your employer offers a 401(k) or 403(b) plan, you can have your employer move the money into that plan for you. If you don’t have either of those, you can set up an IRA account.
Whichever account you choose, the key is that the money gets moved without you having to touch it. We’re not talking about budgeting or discipline here. We’re talking about automation. In The Latte Factor, Henry shows Zoey how much money she could save if she earned 10 percent annual interest. We have other charts in the book that show what the savings would be with interest rates ranging from 2 percent to 12 percent. But the number that matters the most when it comes to saving and investing is your savings rate.
In other words, how much are you saving?
You should start by saving one hour a day of your income. That comes out to 12.5 percent of your gross revenue. If you’re using a 401(k), then hopefully there;s a match. Most employers offer one and it’s usually around 4 percent, so now you’re looking at saving 16.5 percent of your annual income. If you’re in your 20s or even your 30s, that’s a fantastic place to start working toward financial freedom when you retire.
WB: It’s well-known that you hate budgets. In the book, Zoey also hates budgeting. Can you explain why you hate budgets so much?
DB: I’ve been involved in financial services and financial education for 26 years and what I can tell you is that budgets are difficult to set up and people don’t stick to them. It’s a lot like a diet. People tend to start out strong, but after a while, they fall off the wagon.
Budgets also lead to a lot of fights in marriage because we tend not to marry someone who’s our financial equivalent. If you’re a spender, you’ll fall in love with a saver. If you’re a saver, you fall in love with a spender. When you have two people who view money differently trying to create a budget, it can actually pull them apart.
If you want to build wealth for retirement, a college education, a dream home, or a nice family vacation, budgeting does not lead to success. The secret is automatic savings. In my other books, including Smart Women Finish Rich, and Smart Couples Finish Rich, I break savings down into three baskets: a retirement basket, a security basket, and a dream basket. That’s what I recommend: move savings automatically into those three baskets.
WB: Let’s talk about three myths of money you discuss in the book, one of which is that if you make more money, you’ll be rich. Why is that a myth?
DB: For most of us, we’re making more money today than we did 10 years ago. The question is: Are you saving more? The answer in most cases is “no.” As our income grows, our expenses tend to grow along with it. It’s this idea that when the tide goes up, the boat goes along with it. This is what’s known as “lifestyle creep.”
Basically, when you make more money, you desire more things and you spend more money to have those things. That’s the American rat race. Everything in front of us is designed to separate us from our paycheck. But what people eventually realize as they make more money is that having more things actually provides less freedom.
What I teach people is that it’s not about having a certain amount of money so that you can stop working. It’s really about having a lifestyle of freedom and choice. But if you believe this myth that you need to make more money to start saving and investing, you’ll never start saving and investing. You’re only going to see your lifestyle costs increase as you earn more, which means you’ll never get to a place where you feel free.
The message of The Latte Factor is that you can live rich now. You don’t have to wait 40 years to feel free and have less stress and anxiety. You can live that way today.
WB: What about the myth that it takes money to make money?
DB: The common misconception from people living paycheck to paycheck or even middle-class people is that the reason the rich get richer is that they have money. The truth is most people in the U.S. were not born with money. Sure, there are millionaires who were born with a silver spoon, but most made their money through saving and investing.
Tied into that misconception is this idea that you need a lot of money to start investing. That’s simply not the case anymore. Today, you can start investing your spare change. There are robo-advisors and financial service companies that will help you invest as little as $1 a day. So, no, it doesn’t take a lot of money to start investing. But if you get stuck believing that, you’ll never start investing because you don’t see the point. Saving a small amount of money can transform your financial life. Even if you can’t save the first hour of income you earn every day, start where you can.
The smallest amount, even if it’s spare change, can make a huge difference.
WB: Let’s tackle the myth that someone else will take care of you.
DB: I’ve been an advocate and crusader for women’s financial empowerment for 25 years. We’ve had over a million women read Smart Women Finish Rich. My fundamental message to women is based on what my grandmother, Rose Bach, taught me.
She was a self-made millionaire who started with nothing at the age of 30. By the time I was seven years old, she was teaching me how to buy stocks. But the biggest lesson I took from her was, as a woman, you have to take charge of your family’s financial future. That’s what my grandmother, who was married to my grandfather, Jack, did, and thank goodness for that. She changed the entire destiny of our family. I may not be doing what I do if she hadn’t made that choice and taught me everything she did.
The thing that I want women to know is that you need to be involved in your family’s finances. Statistics tell us that 80 percent of men die married and 80 percent of women die widowed. What that means is you can’t afford to be in the dark and delegate your financial well-being to your spouse. You have to be in charge of your money.
WB: David, your tagline has always been live rich, finish rich. When you say “live rich,” what does that mean to you, and how should we be thinking about it?
DB: For me, living rich means that I’m in a position of freedom, that I’m able to do with my life what I want to do. Now, that doesn’t mean every day is rainbows and sunshine, but it means I get to spend my life on my passion, my purpose, and my family. I get to focus my time and energy on the things I love the most. That’s what it means to me.
The whole idea of living rich is looking at what parts of your life aren’t working and figuring out what can you do to get rid of those things as fast as possible. By doing that, you open up room to get more of what is working and what you really want. What I’ve seen time and again is that the fastest way to fix your life is to fix your finances.
Just the other day, a woman posted in our Facebook group that she decided to start saving and investing after reading The Automatic Millionaire. With that one change, she was able to get herself out of a neighborhood where she didn’t feel safe and out of a job that she didn’t like. Today, she lives in her dream neighborhood and has her dream job. She changed her whole life by reading one book and deciding to live rich and taking action!
Living rich means freeing yourself. You’ve got one life to live and you deserve to live your dreams. By fixing your finances, you set yourself up to live the life you want.
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This article original Appeared on WiseBread: