It was recently announced in the news that Starbucks (SBUX) will be closing over 600 stores due to a phenomenon nicknamed “The Latte Effect.” This basically describes the actions people often take when economic times are tough and money is tight, which includes cutting back on extra expenses like coffee, manicures and hair treatments. While some people may be able to relate to this new trend, I personally don’t relate to it at this point in time. This is because I’ve been cutting back on these things for years and tough economic times have really not had an effect on me in this area.
A few years ago when the economy was strong and people seemed to be spending money like crazy, my husband and I got serious about paying off our debt. While doing so, we decided that extra expenses (like coffee and beauty treatments) would be a once in a while treat rather than a regular occasion. Once we paid off all our debt, we decided to continue our way of spending, as in spend less than we make so we could save and invest. With an extra $1000 a month of income that exceeded our bills, we decided to save that money rather than spend it.
At this point we could each afford a daily coffee and I could afford weekly manicures and pedicures if I wanted, but it seemed like just a waste to me. I knew that I could get 1 or 2 pedicures a year and upkeep the rest of the year on my own. We also had an espresso machine to make our own lattes with (at less than $4 a drink) and the thought of paying for a manicure when the polish ALWAYS chips off within a couple days just seemed crazy! I even decided to stop coloring and highlighting my hair because I was happy with my natural color. Forgoing this alone has saved me over $60 every 2 months (not to mention the time it has saved me).
As a young couple starting out and saving for our first house, it just made more sense that the extra money would go farther in our savings account and retirement accounts than spent on something that would chip, fade or be gone in a matter of minutes (I drink my lattes fast). And the power of compounding interest over the years is an incredible concept, especially when you start so young. Plus I don’t even miss those extra things.
So now here we are in a rough economy where prices are rising, incomes aren’t and saving interest rates are declining. I personally haven’t really felt much of an impact because of the money I’ve previously saved and put into my emergency savings account. I also haven’t had to cut back on the “luxuries” because I’ve never really spent that much on them in the first place. In fact, with businesses so eager for customers these days, it’s easier to find discounts and coupons for the extra little things, therefore costing me even less.
My point is that many people are cutting back on these extras nowadays when it would have been wise to cut back years ago and build a sizable emergency fund. For those who have enough money to do both and still invest in retirement, then go ahead. But for those struggling to pay bills and pay off debt, as well as those who can’t seem to find enough money to save (especially the younger people just starting off) it may be a good idea to take the “Latte Effect” into your finances as a semi-long term option. Here are a few simple suggestions on how to implement a more permanent “Latte Effect” into your financial picture. You may have heard these before, but I think they are worth repeating.
Coffee
Either eliminate this altogether (getting an adequate amount of sleep may help rid you of your need for the caffeine) or make your own at home.
Manicures/Pedicures
I usually get one pedicure at the start of the summer and simply upkeep my toes myself. You can find pedicure products at stores from WalMart to beauty supply stores. The basics would just be something to soak your feet in (warm water and soap will work in a bowl from home even), a file, nail clippers and some nail polish. This also goes for your fingers.
Hair
Try sporting your natural color and see if you can cope or maybe even learn to enjoy it! If not, try boxed hair colors from the store- they are a lot less expensive than going to the salon. For men, you might want to try cutting your own hair with clippers. My husband bought a pair so he could cut his own hair. Since he’s in the military and has to keep his hair short, this has saved us a lot of money.
Car washes
Wash them yourself. That’s an obvious one, but if you REALLY don’t have time, try hiring a neighbor kid to do it for a small fee. It’s still cheaper than the drive through.
Bottled water
A Brita filter works just as well.
Extra cable services
Having less channels and skipping the extra movie channels may actually give you more time to do other things, like spend time with your family or wash your car!
Extra cell phone services
I know it’s nice to have internet on your phone wherever you go, but this comes at a price. For me, I can either pay $20 a month to get online the minute I want to, or save that $20 (plus tax) and simply wait until I get home. Not having patience can be expensive.
These are just a few suggestions for saving money on the small things. Obviously there are a lot more and they depend on each person’s specific circumstances. But if you are finding that money is tight and saving money is hard, try cutting back on certain things and put the extra money in savings. If you take a proactive approach to cutting back and saving more, then maybe you won’t have to join the rest of the world in the “Latte Effect” and you can still enjoy your one coffee a week as a treat.
My mother and I recently went through our normal expenses to cut out the fat. My mother states that she and my father will save over $10,000 per year! I know my husband and I will be saving well over $1000.
Starbucks may simply have overexpanded too. I can walk to four Starbucks outlets, and one kiosk in the neighborhood supermarket. And three independent espresso places.
I wish I could find a way to cut an extra $1000 from our spending each month — that would be nifty. But the only luxury I have that is listed is the cell phone, and I don’t know how much of a luxury that is when I do not have a phone at work, or when I am traveling away from home and am trying to hook up with my friends. Maybe more of a utilitarian convenience than, say, a pedicure or enhanced cable services.
Cutting back is hard, but you’re right, it is good to get in the habit before you get to the point where you’re struggling. Of course there are a million things to add to the list–particularly insurance and groceries in my case–but realizing that you have a problem is the key. Most people simply don’t.
The importance of saving on the small stuff cannot be over stated. These small amounts really add up.
On my blog I created an interactive calculator to illustrate the true impact of saving small amounts over the long haul. Check it out:
http://moneyandsuch.blogspot.com/2008/02/latte-factor-calculator.html
Cutting back on unnecessary expenses and saving them instead in a retirement fund will actually make more sense. Before you know it, you’re already a millionaire when you reach 60, if you save it in a mutual fund that earns at least 3%/yr.
Sam
Fix My Personal Finance
http://fixmypersonalfinance.com
@ sam
Ummm, I hope the 3% was a mistype for the mutual fund. You may be a millionaire, but it won’t be worth anything since the inflation rate of 3% will make it entirely a mute point
600 stores closed means that there’s going to be a lot of unemployment.
To poster #6, “mute point”? I’d say that’s a Freudian slip, eh?
I’d love to cut back on all the channels we get from dish satellite. Unfortunately, my significant other is a disabled former Marine. He’s on social security disability and awaiting an increase in his disability rating from the VA. In the meantime, when he’s having to take it easy and sit down, he enjoys watching the Science Channel, Discover, History Channel, Military Channel. Plus, since he contributes a significant amount of $$$ to the household expenses, he feels he has a say in which package we will subscribe.
Perhaps it’s time I called Dish Network to see if they’re offering a worthwhile package that will save me a good chunk of change each month.
Here is my dilemma, I have cut those things so far out of my life it isn