When it comes to building wealth, there is no shortage of advice. However, one principle I personally do not find very valuable is the “latte effect.” This advice suggests that you forgo that latte every morning and invest the $3 you would have spent in savings. Though a good practice in theory, it is not entirely practical, especially if you are one who enjoys your morning coffee.
Before my family and I became 1-percenters, we attempted the “latte effect” strategy, but it was short-lived and impractical. I then began to wonder what would happen if we examined our large cash outlays. The thinking here was that if I was able to save big on these items, I can take the savings and reinvest them.
Though I strongly believe that people should have a budget and stick to it, the real savings comes from large-ticket items that we tend to forget. The strategy here is to obtain exactly the same good or service at a cheaper cost. Unlike eliminating certain pleasures or necessities, as in the “latte” principle, you can continue to enjoy the good or service at a cheaper rate. Below are some items that I have taken advantage of where I was able to save money without sacrificing.
The most common big-ticket items that we overlook are home insurance and auto insurance. There can be hundreds, if not thousands, of dollars in savings available by making a 15-minute phone call to your insurance carrier. There are some companies that will offer you the same benefits as your current insurance carrier, but at a much cheaper rate. Other strategies include raising your deductible or reducing/eliminating a non-essential benefit.
The Cost of Debt
In a low-interest-rate environment, money comes cheap. If you have decent credit, you can secure loans are little to no cost. That said, if you have debt of any kind, start shopping around for better rates. Personally, we are refinancing our home for the second time in six months because the interest rates on mortgages have continued to trend downwards. If you have credit card debt, you can most always get the credit card company to lower your rate or transfer your balance to a 0 percent introductory offer credit card.
If you have excess cash and can pay down high-interest debt, there is no reason not to do so. Being in a low-interest environment also means that money in your savings account is not earning much interest. The theory here is that the interest savings from paying down a debt far exceed the interest rate you would earn in a typical savings account.
After we reduced all of our big-ticket items, then, and only then, did we start to examine smaller daily expenditures to see if there are any savings there. The caveat here is that we would be eliminating a good or service to realize that savings. Lastly, and most importantly, after we realized the savings in the big ticket items, we took the savings, reinvested it, which brought us one step closer to becoming 1-percenters.