Wake Up, America! We're Paying Billions for Personal Financial Advice, and It's Making Us Poorer
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OK, to be fair Bach didn’t just blame the latté. In Bach’s universe, the latte stood for all the small, regular luxuries we treat ourselves to. It could be the once-a-week sushi lunch or the premium cable package or ... you get the idea. “Most of us waste a lot of what we earn on ‘small things,’ ” Bach wrote in The Automatic Millionaire. “The so-called small things on which we waste money every day can add up in a hurry to life-changing amounts.”
There was only one thing wrong with the latté factor. It wasn’t true. It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. It didn’t take into account what life costs were actually rising or falling. The latté factor was, to mix our drinking metaphors, the financial equivalent of the Miller beer—it tasted great, but was less filling.
Bach, whether by design or true belief, had concocted a catchy slogan that appealed to our desire for a quick and easy fix, but one that bore little relation to economic reality.
Bach knew his archetypal latté guzzler could not be spending $5 on a single latté, not in 1999. So he added a biscotti to the bill and factored in the incidental Diet Cokes and candy bars he assumed his subject also bought. Even then his numbers didn’t quite add up. Five dollars a day, 365 days a year, is $1,825. So Bach “rounded” the number up to $2,000 annually, the better to exaggerate the amount of money that the latté was, in the long run, costing the person who was drinking it.
Other numbers were equally as suspect. A 10 or 11 percent average annual return on stock market investments? Such a number had no basis in reality, as anyone who was certified in anything financial should have known. The Dow Jones Industrial Average showed a 9 percent average annual rate of return between 1929 and 2009. And that was a good, long-term, 80-year number, a period very few people besides a lucky trust-fund baby who made it to an old age could hold on for. The short term could be much worse—as we all now know.
There’s more. A blogger at Bad Money Advice, a popular personal finance blog, noticed another problem. Bach, a supposed expert financial adviser, did not take inflation or taxes into account. When Bad Money Advice ran the numbers, remembering those two pesky financial details, he came up with $173,000. Not chump change, for sure, but way short of a million dollars.
Other personal-finance experts came up with even lower numbers, many using Bach’s own “Latte Factor Calculator” on his Web site. Kimberly Palmer at U.S. News & World Report calculated a $3-a-day habit earning three percent annually would net $50,000 in 30 years.
Someone else had been on top of the latte factor too. Unnoticed by almost everyone, first lady of personal finance Suze Orman had also discovered it in her 1999 bestseller The Courage to Be Rich. And what was Orman’s final total?
One medium size Starbucks coffee a day costs $2.75, which means you’re spending $1,004 a year on morning coffee. Invested at 10 percent, that’s $57,504 over 20 years, $98,740 over 25 years, and $165,152 over 30 years.
Even then, our hypothetical Starbucks junkie was not only the luckiest investor ever, we were still assuming that he would encounter no financial ill winds over the course of his career, and no unexpected trips to the unemployment or doctor’s office that would force her to drain the latté money. Because the truth was, despite the claims of Bach and others like him, Americans’ dismal spending and savings habits had very little to do with a caffeine addiction.