I love reading personal finance books. A couple of my favorites are The Millionaire Next Door and The Automatic Millionaire. Many personal finance books, like The Automatic Millionaire, spend a lot of time discussing things like “the latte factor,” which is essentially the idea that small everyday expenses when added up over time can have a significant impact on an individual’s bottom line.
I agree that the latte factor can be a biggie for some folks. But my personal feeling is that, while monitoring your consumption of small things like this is important, I think there is a bigger financial factor that can potentially have a bigger impact on your bottom line. That is the big things, folks. I don’t have a catchy name for it like “latte factor.” Perhaps call it the Elephant Factor if you want. The point is that I think it is totally possible to pay far too much attention to the little things and neglect the Elephants in your life. What would the Elephant Factor consist of? Well, the biggest Elephant in most peoples’ lives would be their choice of housing. Buy the wrong house for the wrong price at the wrong time and you could be seriously causing yourself an Elephant-sized financial headache. If you were to buy more house than you need or not shop around to find the best interest rates, these are other ways you can cause yourself financial pain.
The thing about these types of financial pains is that, unlike your Sunday morning latte, the Elephant factors may continue to cause you financial hardship looooong after the initial purchase of the item. Get a bad mortgage interest rate and you’re looking at paying that rate for potentially decades. Buy a more expensive house than you really need and that is going to increase your monthly expenses for the duration of the mortgage loan. Plus there is the added question of whether you can actually afford to maintain an expensive house. Will you be able to afford to furnish it, pay for the insurance, the upkeep, etc? Same for cars. Buy a more expensive car than you need and that may potentially mean increased car loan payments, increased cost of license/registration, insurance, upkeep/maintenance, etc. Dying to own a boat, a Jet Ski, and RV? Those things usually need insurance and registration as well, not to mention storage and upkeep! These items could all cost you major money on a recurring basis for YEARS. See why I’m calling them Elephants? Hitting Starbucks once a week doesn’t seem like such a crime now, does it?
I’m not saying we should all feel free to start drinking all the expensive coffee that we want. But I think that sometimes it’s easy to fall into the trap of being unable to see the forest because of all the trees. 🙂 I personally enjoy an expensive coffee once in a while, and if it’s within the realm of our budgeted disposable income for the month then we usually don’t feel too badly about it. But we think long and hard before we do anything that could potentially increase our recurring monthly expenses. Our regular monthly expenses we feel have the potential to “magnify” their financial impact- meaning, if we allow them to increase, the increase will most likely continue to be felt for a long time. It is also difficult to modify most recurring expenses- if we were to hit hard times it would be very difficult to decrease the amount of our monthly mortgage payments, student loan payments, insurance premiums, etc. Whereas we could simply stop buying extras like coffee.
Obviously there needs to be a balance. It would not be a good idea to be the person who has the Elephants majorly under control, lives like a pauper in every other way, but wastes tons of money on lattes (I’m laughing as I envision what this would look like- perhaps someone hitting the Starbucks drive-thru on bike wearing the same clothing that they’ve had since high school, and then biking back to their parents’ basement seven days a week??? Btw, if this describes anyone who is reading this, I am sorry… truly!) Anyway, I would argue that perhaps we should spend a lot more time sweating the Elephant Factors and less time sweating the lattes. 🙂
What do you think? Do you spend as much time worrying about your Elephants as you do your lattes?
Photo credit: Megan Coughlin