Here's my concise notes from Fundamental Analysis to identify great businesses from Adam Khoo's Piranha […]
Phase 2 is approaching and this means that there will be more customers at Bubble Tea shops! I was a fan of bubble tea previously so I am interested to learn about the true cost of bubble tea on my personal finances.
We are more aware about how much money we spend on large purchases, as compared to the small things we spend on. But the seemingly trivial expenses incurred can derail our progress in accumulating wealth.
Small amounts of money spent on a regular basis cost us far more than we can imagine.David Bach
David Bach coined a term “the latte factor”, describing the small amounts we spend here and there. If we add up the cost of our daily lattes and invested it, we could build up wealth significantly faster.
My favourite Bubble Tea
- Green Tea Macchiato (M) $3.30
- Bubble Q Milk Tea (M) $4
- Caramel Milk Tea with Ice Cream (L) $6.50
At first glance, the results are pretty surprising. A discretionary, but regular expense can be so impactful on our finances? It's more obvious that the total cost amounts to $13,520 ($6.50 every week, for 40 years). However, the true cost of spending is the forgone interest earnings compounded over many years – not the actual money spent.
If we choose to invest the weekly $6.50 expenditure at an annual interest rate of 5%, compounded annually, we would earned $29,462 in interest. So, the real cost of our bubble tea expenditure is actually >$40K.
Compound interest calculator can bet found here.
What you will discover when calculating your latte factor is the biggest cost of periodic spending is not the money you wasted. It's the forgone interest of that money compounded over many years. The forgone interest is the surprising truth behind the latter factor that can literally make or break your wealth.
I touched briefly on how we self-sabotage our finances unintentionally here.
Small trivial things we spend on every day add up to an extremely large amount over time. Taking control of our latte factor calls for discipline in spending habits. Hopefully this analysis will help us get a better grasp of our everyday spending.
Now we know about the high cost of small, periodic spending, what spending will you cut down on?
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