Xin Lu
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Posts by Xin Lu
What is “Quantitative Easing” Anyway?
August 13, 2010 - 7:00 am
Tags: banks, federal reserve, Financial News, quantitative easing
Posted in Uncategorized | No comments
Recently, the news is abuzz with the term "quantitative easing." What is it anyway and how does it affect you?
Quantitative easing is the act of central banks injecting the economy with cash in every conceivable way. In response to the financial collapse and the ensuing recession, central banks around the world used every tool at their disposal to increase the money supply. The US Federal Reserve has been extremely proactive in coming up with innovative solutions to increase the amount of capital available to banks, increase the money supply, and prevent deflation. These "creative" solutions fall under the umbrella term "quantitative easing," although the US Federal Reserve has attempted to distinguish its strategy by phrasing it as "credit easing."
Basically, quantitative easing is a monetary policy where central banks "print" money and introduce this newly created wealth into the money supply by purchasing securities on the open market. The banks from which these securities are purchased then have additional capital beyond their reserve requirements that they can loan, invest, or horde for themselves. Quantitative easing is usually employed when the federal funds rate is at or near 0% because there is no possible way to lower this rate.This results in the Federal Reserve expanding its balance sheet. In the past couple years, quantitative easing has often been in the news as the Federal Reserve agreed to buy billions of dollars worth of government bonds, mortgage bonds, and other securities.
The intended short-term result of quantitative easing is to increase the money supply and stimulate the economy. By purchasing government bonds on the open-market, the Federal Reserve can lower interest yields, which in turn lowers the interest on new debt, potentially encouraging companies and individuals to consume more credit and increase spending.
Conversely, quantitative easing lowers the deposit rate, or the rate banks pay depositors. A lower deposit rate reduces the benefits of holding savings, and encourages depositors to consume their deposits or seek other investments. The end result of quantitative easing is intended to benefit consumers. Decreased borrowing costs and an expanded money supply is supposed to increase demand and consumption. Once demand starts increasing, confidence should return to businesses and hiring will resume.
Modern economic theory argues that deflation is one of the worst possible economic outcomes and quantitative easing is supposed to prevent that. The idea being that if deflation takes hold and prices continue to fall, consumers will delay purchases, assuming that prices will be cheaper in the future. Delaying purchases decreases demand and leads the economy on a downward spiral. Furthermore, quantitative easing reduces the pressure on banks by increasing their available capital and increasing demand for loans.
The biggest risks associated with quantitative easing can occur when the folks in charge introduce too much cash with their policies and hyperinflation results. If there is a great increase in the money supply, then real goods, commodities, and services can drastically increase in price while savings and the value of the dollar are destroyed. Creditors will lose real return on their investments and the effect on the country’s credit could be disastrous. These problems can be exacerbated by politicians who see government debt being purchased and use the opportunity to increase government spending without increasing taxes.
The bottom line is that quantitative easing can be a double-edged sword. In the case of Japan, quantitative easing did not work and deflation ensued for years. This could also happen in the United States. What do you think? Should central banks around the world continue their policy of quantitative easing to battle deflation and spur borrowing? Have you taken advantage of the lower interest rates?
Simple Strategies for Using Your Leftover Food
August 10, 2010 - 7:00 am
Tags: leftovers
Posted in Food, Food and Drink | No comments
Sure, it looked great in the grocery store a month ago, but that forgotten perishable in the back of the fridge is now only worth its weight in garbage. American households throw away $600 worth of food per year and many families cannot afford that waste. Here are some creative and simple ways to use up leftover food and stretch your dining dollars.
Make soup
Use various scraps of meat and veggies to make a soup using an appropriate stock. If you want to make stock from scratch you can boil water with leftover bones from a rotisserie chicken or loin roast.
Fill up tacos
Leftover hamburgers or beef can be transformed into a taco filling by simply re-heating and adding some taco seasoning. You can also use leftover salad, corn or cheese for extra fillers.
Spice up breakfast
Many vegetables like celery, corn, spinach, and tomatoes go great with scrambled eggs or they could be folded into an omelette. Add in the leftover steak for a gourmet breakfast. Leftover mashed potatoes can also be formed into patties for a quick hash brown substitute
Make a sandwich
Just about any meat can be put to good use between two pieces of bread. Experiment with leftover sauces (marinara, salsa, guacamole) and vegetables for extra variety.
Homemade bread crumbs and croutons
Leftover dinner rolls and bread can be left out after dinner to be used to make croutons or bread crumbs the next day. Bread crumbs can be preserved and used weeks to months later as long as it is kept in a dry place and do not get moldy.
Use the food dehydrator
Almost any food can be dried and preserved. You can make your own fruit chips and jerkies. There is an excellent guide to dehydrating food here on Wise Bread.
Extend freshness with water
If you only used part of your green onions, celery, or any herb, keep it in a glass of water in the fridge to extend its lifetime for another use.
Bake it
Leftover carrots, zucchini, bananas, strawberries, pears, and plums can be incorporated into breads, cakes, and cobblers for a homemade dessert. You can also add a bit of cinnamon and brown sugar to a halved peach, pear or apple and bake until soft for a healthy and quick dessert.
Melt it
Leftover cheese can be melted down over a double broiler for nachos. You can also use melted cheese as a pasta sauce.
Roll it up
Leftover cold cuts can be smeared with cream cheese and rolled around a green onion or pickle for a unique treat, or heat refried beans and cheese on a tortilla for a Mexican wrap.
Wrap it with lettuce
Give leftover lettuce an Asian twist by using them as a wrap and add fillings such as chicken, pork, and rice. It is like a low-carb taco and tastes quite refreshing.
Mix it up in a salad
Use leftover meats or pasta mixed with vegetables like pickles, celery and broccoli and some mayo for an easy chicken, tuna, or pasta salad.
Grill it
Fire up the grill and add your leftover peppers, tomatoes, onions, and even avocados for a different taste and texture to incorporate into almost any dish.
Compost it
No one can save every leftover meal, but any food scrap can go into a compost pile. You can start a compost pile that can be used for fertilizer in the yard. If you do not know where to start, Andrea has written a guide to urban composting. If you do not have plants you can donate compost to a neighborhood garden project.
Freeze it
Most leftovers can survive in the freezer for a few weeks. This also goes for cheap cuts of meat or herbs. You can always buy them cheap and freeze until you need them.
Preserve it
Canning and preserving are not just for grandma anymore. All you need is a pot of boiling water, tongs, and jars to preserve vegetables and fruits for the next year. There is a great how-to guide for beginners here on Wise Bread.
Pack it for lunch
Leftovers are great for brown bag lunches. Most workplaces have a kitchen for reheating and you can save quite a bit on lunch. If you have children it is also good for them to have a homemade lunch.
Food is meant to be manipulated, experimented with, and most importantly, eaten. These are just a few ways to get rid of your leftovers, though I think that it is just as important to prevent the existence of leftovers by buying only what you can eat in a reasonable amount of time. What are your strategies for using up leftovers?
6 Great Reasons for Paying off the Mortgage on Your Home
July 29, 2010 - 7:00 am
Tags: debt, mortgage, pay off debt, Real Estate, Real Estate and Housing
Posted in Uncategorized | No comments
Should you pay off the mortgage on the home you are living in? Mortgage interest rates are at historic lows and a fixed rate mortgage seems to be a deal of a lifetime right now, so why would anyone pay it off? Here are six reasons why paying off your mortgage is still worthwhile in the current economic climate.
A Mortgage Is a Cost
Even with a tax deduction, the interest you pay on a mortgage is still a cost. I don’t think it makes sense to continue to sending the banks interest just so that the government returns a little portion of it back to you. It is really only a great deal for the bank if you keep your mortgage for its full term.
Cash Flow
One reason many people do not pay off their mortgage is that the extra money you put into your house isn’t as liquid as cash sitting in an account. However, once the mortgage is completely paid off, you will free up the amount of money you used to send to the bank. That money can be saved or spent on other things as you wish.
High Investment Returns Are Rarely Guaranteed
I know that many folks would argue that today’s low interest rate mortgages mean that you can use the money to invest and earn a yield higher than the mortgage. However, it is fairly impossible to find a guaranteed investment that pays more than the average mortgage rate right now. Money markets are yielding near 0%, and the stock market is quite volatile and has long periods of stagnant or negative return as we have seen in the past decade. Basically, there is no guarantee that you will beat your mortgage rate with your investments.
Security Against Income Loss
If you have a paid off home, then you are much better insulated against income or job loss because you do not have that liability every month. Many people take 30 year mortgages these days, but how many people actually have a job guarantee for 30 years? My guess is that most of us will go through a period of reduced income in three decades. The sad thing is that if the mortgage isn’t paid off then the bank could take back the home after three or four missed payments even if the homeowner has been paying on time for years.
Home Equity Is Accessible
One argument against paying off the mortgage is that money put into a home is illiquid. This is true to an extent. There are ways to release the home equity as long as you have equity in the home. Home equity lines of credit are relatively cheap compared to credit cards, and seniors can opt to take a reverse mortgage. It usually costs some money to release the equity in your home, but it is possible to still live in the home if you really needed to tap your home equity. For some people, the fact that home equity is less liquid is actually a good thing because they would be less likely to spend it. I think of home equity as an emergency fund, and it should only be tapped when absolutely necessary.
Debt Is Bad During Deflation
Although mortgage rates are near historic lows right now, I think that deflation is a possibility in the near term. In the face of deflation any type of debt is getting greater in real terms. Basically, your wages will probably decrease in the current economy while your debt is just as large or grows even larger. It is better to retire the mortgage or be a renter in the face of deflation.
Although I completely understand that it is possible to keep a mortgage on your home and then make a profit on investing, I feel that it is a gamble on your residence. The stock market has had long terms of zero or negative growth so unless you have a guaranteed investment that pays more than your mortgage rate, then it is probably best to retire that debt once and for all. Once you are free from a mortgage you will actually be a homeowner, and no longer a homedebtor.
5 Ways to Make Money with Amazon Mechanical Turk
July 19, 2010 - 6:00 am
Tags: Extra Income, making money online, mturk
Posted in Uncategorized | No comments
The Amazon Mechanical Turk or MTurk is a service that was created so that those who need work done can hire thousands of human workers for much less than minimum wage. Each task is called a HIT and it can be as simple as clicking a link and as complex as writing an entire computer program. If you are a worker in the system you will not be compensated very well, but there are quite a few ways the work requesters are profiting from this service.
1. Transcription Company
There are several transcription companies that are quite active on MTurk. They pay the MTurk workers or "Turkers" less than 50 cents for each minute of transcription and sell the end results to various clients. They do control for quality, but the profit margin on these transcriptions is at least 50% to 70% by my calculations. If you have the connections to start a transcription company or just need some transcription done then MTurk would be a great place to source your workers.
2. Content Sourcing
Many requesters seem to be building content sites and they are getting their content for dirt cheap on MTurk. Quality is an issue, but then the same requesters just have more MTurk workers do quality checks on the results they receive. It’s quite funny, but I have to admit that it is effective. If you want to get a slew of cheap content fairly quickly then MTurk may be the place to go. The different types of content I have seen vary from polls, quizzes, questions and answers, and articles. Theoretically you could also build a trivia game.
3. Research
There are many research projects conducted on MTurk. Some of the companies that do research on MTurk in turn sell their research results for a profit, and some are actually university researchers who are doing a project. Either way, MTurk is a good source of willing participants for research. When I was in college I often see labs pay research subjects $10 an hour or more just to answer some questions, but now on MTurk researchers can get subjects for as little as 5 cents each.
4. Data Collection and Mining
There are many tasks that ask people to find information. For example, there are batches of jobs that ask for the email address or contact information of certain politicians. Other jobs ask for the email addresses of college financial aid offices. With thousands of people collecting data the jobs are done much faster.
5. Art
The Sheep Market is a quirky project done by Aaron Koblin. Basically, he commissioned 10,000 sheeps facing left on MTurk for 2 cents a piece. The end result was quite fascinating and some of the Turkers actually drew very complex sheep. Now the sheep are selling for $20 a piece and the art piece has been exhibited internationally. If he sells all the sheep he would have made a profit of 100000%.
If you are not in the mood to systematically profit from MTurk, then you could always do a few HITs for a few cents. You do have to be careful not to do the tasks posted by scammers, and these are detailed in a post at the Turker Nation forums. In my research for this article I did a variety of paying tasks and I have to admit that I actually learned quite a few things even though my effective hourly wage was below $2. Many of the tasks are great for people who are bored and want to earn a tiny bit of money. I am thinking of designing some tasks and hiring some Turkers to build something profitable. I’m not quite sure what I would do yet, but the possibilities are endless. What is your idea for using this service?
Book Review – The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means
June 29, 2010 - 12:22 pm
Tags: book review
Posted in Lifestyle | No comments
The Cheapskate Next Door is Jeff Yeager’s sequel to The Ultimate Cheapskate’s Roadmap to True Riches. In this new book, Yeager takes a bicycle tour across America and meets many like minded people.
I haven’t actually read Jeff Yeager’s first book, but I am familiar with his writing on Wise Bread and the Early Retirement forums. He kindly offered me a review copy of his new book and I jumped at the chance to read it. The Cheapskate Next Door is actually the result of Jeff’s unconventional way of promoting his first book. Basically, he took off on his bike and couch surfed on his book tour across the country. Along the way he met kindred souls who shared their homes and cheap way of life.
The book is structured so that each chapter discusses one aspect of life such as food or transportation. Each chapter is full of personal stories and also has a few practical money saving tips called "Cheap Shots." Some of the cheapskates Yeager meets are out there even by the Ultimate Cheapskate's standards, and that makes the book quite entertaining.
Although Yeager does not have children, I thought that the most interesting and helpful chapter in the book was about how cheapskates raise kids. He wrote very little about kids in his first book, and that elicited a lot of responses which he compiled into this book. The main idea of the chapter is that you have to learn to say no to your kids and teach them delayed gratification. Children can be well cared for without all the latest gadgetry, and I totally agree with that sentiment. An interesting Cheap Shot in this chapter is that there are now toy libraries in America where parents can borrow toys. This chapter also goes on to talk about how to save on college costs, and shows that a child does not have to cost $222,000.
One of the shorter chapters is called "Break the Mortgage Chains that Bind Thee." The simple message here is that paying off a mortgage is the best thing one can do for their peace of mind. Of course, many would argue that today's low interest rates means that having a mortgage may not be a bad idea financially, but I agree with the fact that having one less payment per month is a great thing.
One thing that delighted me about this book is how the people Yeager met seemed extremely proud of their lifestyle. They revel in the fact that they have a minimum amount of debt and seem to love their lives. I liked the book quite a bit for its jovial tone and its message that you can live happily without being plugged into extreme consumerism.
Disclosure: This post contains affiliate links, and I received a free copy of the book reviewed.
Commission Free ETFs: A Great Option for Cost Conscious Investors
June 10, 2010 - 6:00 am
Tags: ETFs, Investment
Posted in Uncategorized | No comments
ETF stands for Exchange Traded Funds. Essentially they are mutual funds that trade on the open market like a stock and have their values updated continuously instead of at the end of the day. Recently several major brokerages have started to offer their ETFs without a trading commission, and this is great news for those who are just starting to invest and want to minimize their investing costs.
Recently W.C. Porter wrote about why ETFs suck, and I definitely do not agree with his view of ETFs. In fact, ETFs have several advantages over mutual funds. One is that the expense ratio is generally lower for funds of the same type, and also there is no minimum investment so you could buy as little as one share of the fund. ETFs are also considerably more liquid than mutual funds because you can sell your shares whenever the market is open whereas mutual funds can only be liquidated at the price at the end of the day. Even if you are a buy and hold investor there comes a day you would want to liquidate your shares, and in my opinion it is better to own an ETF than a fund if you want to sell. It is true that with trading commissions it does not make sense to deposit small amounts of money into ETFs, but now the following fund companies are offering ETFs without a commission so that disadvantage is mitigated.
Vanguard
Vanguard currently offers 46 ETFs with low costs. You can now buy Vanguard ETFs without a commission if you open a Vanguard brokerage account. Although the trades will be commission free, if your account has less than $50,000 in it then you will be charged a $20 yearly account fee. Also, if you trade the same fund more than 25 times in a year there may be trading restrictions. Full details are available at Vanguard. Some of the popular funds in the Vanguard ETF family include Total Bond Market (BND) and Total Stock Market (VTI).
Charles Schwab
Schwab currently only offers eight ETFs, but their costs are also very low. To get these ETFs without a commission you would need to open a Schwab brokerage account.
A couple Schwab ETFs actually have lower costs than the similar Vanguard offerings. A great thing about the new Schwab One accounts is that there are no annual fees even if your account balance is small. On a side note I also have their excellent Invest First Visa Signature Rewards card that gives 2.0% back on all purchases. Since Schwab ETFs are now commission free I am thinking of investing my credit card cash back into these ETFs.
Fidelity
Fidelity is offering 25 ETFs from the iShares family without a commission. iShares ETFs are also very popular and they are administrated by Barclays. To get these ETFs commission free you would need to open a Fidelity trading account.
Most of these ETFs track a popular index, and hold a large number of stocks or bonds. The costs and index tracking differ a little on each ETF so it is up to you to make the best choice. Most of these large ETFs track their underlying indices very well. Currently I do not own the above funds but I am thinking of opening a Vanguard brokerage account to take advantage of their excellent lineup without any commission. I do own some ETFs from the large SPDR fund family which introduced the first ETF SPY in 1993. Since Vanguard, Schwab, and iShares are all offering commission free ETFs it is possible that some SPDRs ETFs may become commission free sometime in the future. The bottom line is that I believe that commission free ETFs are great low cost alternatives to index funds, and as always you should do your own research before investing.
Book Review: Hot (Broke) Messes – How to Have Your Latte and Drink it Too
May 29, 2010 - 9:00 am
Tags: book review, debt management
Posted in Shopping | No comments
Nancy Trejos is a personal finance writer for the Washington Post. While she was advising readers on financial problems, she was actually so broke that she had to ask her hardworking immigrant parents for money. Hot (Broke) Messes is Trejos’s confession of all her personal finance mistakes, and how she Finally learned to manage her money.
If you want a detailed how-to guide to living well on a budget, this book is not it. But the author does give a great narrative of the big financial mistakes she made and gives some basic tips on managing one’s finances. One of her biggest financial mistakes was to buy a home with her fiance with her mother’s gift of a downpayment. Later she had to sell the home at a loss after she broke up with the man. This portion of the book is actually something I have seen happen over and over again to young adults with immigrant parents. In the immigrant community many parents push their adult children to buy a home because it means owning a part of America, and many of them fork over hefty downpayments out of love. Unfortunately, many of these children are just not ready for homeownership, and the parents’ hard earned money is wasted. Trejos writes that she felt horrible for losing her mom’s money, but she could not afford the mortgage on her own after her fiance left her. A significant lesson she learned from this trial is to not tie her financial wellbeing to another person.
Another one of Trejos’s mistakes is to buy a new car just because she thought it was cute. She bought the car with a loan and it was immediately underwater. When she wanted to get rid of it she couldn’t sell it for the balance of the loan. This is a good reminder that buying a new car with a loan is a horrible deal because as soon as the car is driven off the lot the loan is basically underwater. It was a little funny to read that she started to take the bus, but still had to keep the car.
There were several portions of the book where the author wrote about emotional spending. She spent money to recover from her breakups, and just to make herself feel a bit happier. She finally hit bottom when she had to call her parents to ask for money even though she made more than $80,000 a year as a writer for Washington Post. Eventually she realized that her way of life is not sustainable and found herself a financially planner and worked out a budget. Towards the end of the book Trejos writes a diary of her financial "hits" and "messes." I thought this portion was quite funny because many of her "hits" were summaries of how she did not have to spend money for food and booze because her friends and family paid for her.
There are a few pages of concrete tips on saving money in this book, but they were very brief. I think the main value in this book is that it is a story many young adults can relate to, and perhaps by reading this book many young people can avoid the mistakes Trejos made. Although the book sports a hot pink cover and is targeted towards young women, I think many young men could learn a few things from the author's experience. If you enjoy stories of personal finance trials and errors, then this a great light read. However, if you want real tips on how to "have your latte and drink it too", then you should definitely check out Wise Bread’s 10001 Ways to Live Large on a Small Budget!
Disclosure: I received a free review copy of this book and this post contains affiliate links.
Book Review – Buying a Home: The Missing Manual
May 21, 2010 - 12:57 pm
Tags: book review, buying a home, housing, Real Estate, Real Estate and Housing
Posted in Uncategorized | No comments
Housing prices have dropped all across America in the past couple years, and more people are looking into buying a property instead of renting. If you are an eager house hunter and do not know where to start then Buying a Home: The Missing Manual by Nancy Conner(affliliate link) is the book for you.
The book is separated into four sections. The first is Preparing for Home Ownership. This section discusses the pros and cons of buying a home, and the financial implications of being a homeowner. In this section the author also gives some good tips on improving your credit and lowering debt so that it would be more likely that you will get a loan.
The second is Finding Your Home. This section zeroes into the house hunting portion of the home search. It included a good chart of common euphemisms real estate agents use to make properties sound better than they are. For example, "jewel box" and "cozy" both mean that the house is very small. This section also talks about finding a real estate agent and other professionals that would help with the home search.
The third section is Financing Your Home. This section is important to any home buyer because it discusses the different types of mortgages and closing costs with real numbers and examples. If you could fully absorb this section of the book then you would have a good idea of what to expect on your loan and closing documents. This section may be a little overwhelming to read for those who do not regularly deal with numbers, but it is very important to understand the loan you are getting into before signing the dotted line. The book also goes over the HUD statement so that a potential home buyer knows what the fees are.
The final section is Negotiating and Closing the Deal. This portion discusses what to offer for a home, and how buyers can negotiate with sellers on issues beyond price. For example, buyers could ask sellers to cover a part of closing costs. The book also discusses how inspections work and what happens if things go wrong.
I really liked this book for its straightforward and informative writing style. I also liked that the book was very comprehensive and covers the entire home buying process from beginning to end. When my husband and I purchased his parents’ house I did a lot of research on my own and it took a lot of time to gather all the information that was covered in this book. I could have saved a lot of time if I had this book. One word of warning is that this book is definitely targeted towards American home buyers because the laws and procedures mentioned do not necessarily apply to other countries. However, the general advice on preparing for home ownership and negotiation are useful for any house hunter.
Finally, the book also has a companion website where readers can get updates to the book. Another book in the Missing Manual series called Your Money: The Missing Manual" was recently reviewed by Philip Brewer.
Disclosure: I received a free review copy of this book and the post contains an affiliate link.
Book Review: Spent: Memoirs of a Shopping Addict
April 29, 2010 - 11:20 pm
Tags: book review, Credit Cards, shopping addiction
Posted in Shopping | No comments
Avis Cardella is a former model and a freelance fashion writer who had a serious shopping addiction. In Spent: Memoirs of Shopping Addict (affiliate link), she writes about her struggles with acquiring more and more stuff without fulfillment for two decades. This is the painful story of a true shopaholic.
This book will probably be fairly revolting to a frugal person, and I really felt like I was rubbernecking at a trainwreck as I read about how the author spent more than she earned for decades and bought things that she did not even use. To her detriment, various wealthy men in her life also enabled her addiction and cultivated her expensive tastes. Some portions of the book really made me want to go up to this woman and shake a little sense into her, but I thought that she was also quite brave to write such a deeply personal memoir and air out so much of her dirty laundry.
To be honest, I could not relate to this book at all because I am not into shopping, but I think it may be a great book for those who want to understand how debilitating oniomania, or shopping addiction, could be. Ms. Cardella writes in detail about how "trance-like" shopping gave her happiness temporarily and then fill her with disgust and guilt. She repeats this ritual ad nauseum and it is true insanity.
In addition to the personal story, Ms. Cardella also gives some good background history on the rise of the "mall culture" in America. Since she worked in the fashion industry she also has some good insights into how advertising makes people want things they do not necessarily need.
I found the book to be quite serious and heavy, and it made me realize that an activity as innocent as shopping can evolve into a disease. Ultimately the author realized that acquiring more stuff was not fulfilling her emotionally and made drastic changes in her life. I would have liked to read more about her recovery process, and I sincerely hope that she is doing well.
Do you know anyone with a serious shopping addiction?
Disclosure: I received a free advanced copy of this book.
3 Reasons Why Keeping Your “Latte Factor” Will Help You Save Money
April 16, 2010 - 7:00 am
Tags: Budgeting, Latte Factor
Posted in Lifestyle | No comments
"The Latte Factor" is a term referring to the small expenditures that you make every day that could add up to huge savings over time. This concept was popularized by David Bach in his book The Automatic Millionaire (affiliate link) and now there are many articles that tell you that saving just $5 a day on coffee will make you a millionaire. The math behind these articles is sound, but should you give up your little indulgences? Here are a few reasons why keeping your "latte factor" will help you save.
It is a small price to pay for happiness.
My husband’s latte factor is bubble milk tea. Every week he gets one because it makes him happy. When I started dating him I actually told him that his milk tea fix is costing him hundreds of dollars a year. Needless to say he was not pleased and argued that he saves enough money to justify such a small expenditure. After I thought about it, I actually agreed with him. He works hard for his money and he deserves to get this one small thing that costs less than $5 a week. I believe that saving money should not be a punishment, so when you deprive yourself of a tiny expense that makes you happy, the whole exercise of saving money will become a negative experience. When we experience negative emotions we are more likely to give up on an endeavor, so if your latte factor gives you a cheap dose of happiness then it is worth keeping.
You can save more elsewhere.
If my husband did cut out his milk tea habit then we would have a few hundred dollars more a year, but that pales in comparison to how much we saved when we asked for a rent reduction and refinanced our mortgage. If you really want to keep your small indulgences then you should try to save on the big things. How many lattes can you buy if you cut out cable TV and watched shows online instead? There are many ways you can save without sacrificing anything in your lifestyle, and I think those things should be done before you stop going to Starbucks.
Reward yourself for saving.
Ultimately, money is meant to be spent. I think it is a good idea to keep your latte factor as a reward for saving money. For example, if you hit your savings goal for the month then there is no reason not to enjoy a little bit of your money. If you keep your small luxuries as a reminder to save money, then they will work out to be positive reinforcement.
The concept that saving a little everyday will add up to a lot over time is definitely sound. However, the fallacy in "eliminating the latte factor will make you a millionaire" is that those who cut out their morning coffee or newspaper usually do not save that money at all. More often than not I have seen people who stopped spending on little things blow the "savings" on something bigger. As long as you are committed to saving consistently, you can build up your nest egg and still keep the small expenditures that enhance your life.
What is your "latte factor"? Have you attempted to cut it out to save money?