The Latte Factor

You’re more well off than you think, because wealth is a mind-set.

Zoey Daniels is a 27-year-old associate editor working at a travel magazine in New York City. She commutes from Brooklyn to Manhattan, but can’t afford to travel. She doesn’t own a passport and has never been west of the Mississippi.

Zoey’s boss, Barbara, notices Zoey is acting distracted. Zoey explains she had fallen in love with a photograph at Helena’s Coffee in Williamsburg. The photograph is four feet wide by three feet high and depicts a seaside village at dawn with a fishing boat crew heading out to sea. Zoey wants the photo but can’t afford it. Like many millennials, Zoey has student loan debt and a high rent. The word “budget” isn’t in her vocabulary; she is still paying down credit card charges from Christmas.

“Zoey thought she would qualify as a poster child for the phrase, living paycheck to paycheck.”

Zoey figures the photograph costs $500, $800 or $1,000 – all above her means. Barbara urges Zoey to talk to Henry, the older barista at Helena’s. Zoey feels a little guilty lying to Barbara. A more lucrative job offer from her friend Jessica’s company is distracting Zoey even more than the photo. Jessica works for an uptown media agency. If Zoey accepts the position, she will earn more money, but will also experience more stress and have a more demanding schedule. Zoey is wavering and has until Friday to decide.

The next day, Zoey wakes 15 minutes early to linger over the photograph at Helena’s Coffee. It has a title and a price – “Yes” for $1,200. An older man named Henry Haydn tells her the photographer shot the photo in Mykonos, Greece. Zoey says her boss, Barbara, wanted them to meet and talk. Henry says “Yes” is his favorite photograph, but Zoey tells him she can’t afford to buy it. Henry replies that it is possible that Zoey is in fact richer than she believes herself to be.

Put money away for yourself first.

On Wednesday, Zoey arrives at the coffee shop to finish her conversation with Henry. He asks her what she would need to change about her life in order to afford the photo. She says a higher-paying job. Henry wonders if she is making more now than when she first started working. Zoey replies in the affirmative. Barbara promoted her two years earlier from assistant editor to associate editor. Even though she is making more now, she can’t seem to get ahead financially.

Henry references a study that found half of Americans didn’t have an extra $400 to pay for an emergency and that seven out of 10 people lived from payday to payday. They weren’t putting money away in savings or in a retirement account. When asked why, they said it was because they didn’t have enough income. In fact, the more they earn, the more they spend. Henry cites celebrities and lottery winners who go broke despite having millions as examples of this phenomenon.

“Earnings are like the tide, you see, and your spending is like a boat. When the tide rises, the boat rises with it.”

Henry tells Zoey there are three secrets to financial freedom. The first one is to set a portion of your income aside for yourself first. Henry tells Zoey to think of work like a clock. If you work a typical office job starting at 9:00 a.m., the pay from your work from 9:00 to 11:30 a.m goes toward your taxes. From 11:30 a.m. to 2:00 p.m., that pay covers rent or mortgage and utilities. From 2:00 to 3:00 p.m., your check pays for transportation, and what you earn from 3:00 to 5:00 p.m. goes toward everything else: health care, entertainment, credit cards and so forth.

Parents teach children to save coins in piggy banks to buy things they want. For adults, the piggy bank equivalent is a 401(k) or other retirement account. That money comes right out of your paycheck, so you don’t have to think about it. Henry shows Zoey how much she could earn by saving just $5 a day. Assuming she put it in an account earning 10% interest, $5 a day would equal $1,885 in a year, $30,727 in 10 years and $948,611 in 40 years. If Zoey doubles her savings to $10 a day in an account with 10% interest, she’d earn $3,770 in one year, $61,453 in 10 years and $1,897,224 in 40 years.

“What ‘pay yourself first’ means, is that the first person who gets paid is you – and you keep that money. In other words: You pay yourself the first hour of each day’s income.”

If Zoey’s salary is about $1,000 a week, she earns about $200 a day. Paying herself for the first hour of a day would amount to $25 per day or $6,500 per year – more with interest. She’d earn $6,798 in a year, $110,821 in 10 years and $3,421,327 in 40 years. Zoey is stunned by the idea that she could earn more than three million dollars by setting aside an hour’s daily pay. Henry calls her $10 a day the “latte factor.” He tells her it is also how she could afford the photograph. 

Make budgeting automatic so you don’t have to think about it.

Zoey meets Henry’s friends, Baron and Georgia, at Helena’s Coffee. Baron works in the energy business. He asks her if Henry has shared the three secrets with her. As they chat about finances, Zoey is delighted to find out Baron shares her disdain for budgeting. He compares budgets to on-again, off-again diets. Henry does not disagree. He tells Zoey the second rule of financial freedom is to make saving automatic. Having a 401(k) account is an easy way to save for retirement because you don’t have to budget in order to save: Every two weeks, money comes straight out of your paycheck into a 401(k) or other retirement account, such as an IRA or self-employment plan (SEP IRA).

“But when you get past all the drama and look at the big picture, it all averages out. Markets go up, then down, and then up again – always.”

Zoey asks Henry whether it is actually possible to get a 10% return on your investment. Henry points out that even boring, conservative stocks usually earn at least 8% per year, historically. Regardless of the number, compound interest works the same. Getting rich by hitting the lottery or inheriting money happens more in the movies. Most wealthy people build their fortunes one dollar at a time.

Baron explains that he was in the oil business during boom times back in Texas. His first million was easy to win and proved as easy to lose. Georgia said Baron needed a quadruple bypass after he had a heart attack. While he was recovering, Georgia discovered their finances were in complete disarray. Their houses carried multiple mortgages and, like Zoey, the couple only made minimum monthly payments on maxed-out credit cards. They were in so much debt it was hard to see a way forward. 

The couple met Henry when they stopped for coffee while perusing art galleries in Brooklyn. Ultimately, Baron and Georgia got their finances in order, but their situation provides a cautionary tale to Zoey. Georgia tells Zoey that most marriages fail because of money – not because of the money itself – but because of a lack of communication about money.

Recognize the three myths about money.

Zoey realizes she had incorrectly assumed Henry was merely a barista. Though she had avoided talking to Barbara for several days because she was contemplating the other job offer, Zoey asks Barbara why she didn’t tell her Henry owned the coffee shop. Barbara said it wasn’t her business to tell Zoey he was the owner; Barbara merely thought Zoey could benefit from Henry’s advice. Barbara tells Zoey that she needs to understand three myths about money:

1. You’re rich when you make more money.
2. You need money to make money.
3. You can depend on someone else to take care of you.

“Most people think they have an income problem. They don’t. They have a spending problem.”

Barbara says a good income is necessary, but people waste time chasing jobs with a higher salary because money isn’t everything. The idea that you need a bunch of money in order to make it is a myth, Barbara says, as evidenced by the charts Henry drew showing how much a person could make by investing only $5 or $10 a day. She says she always feels like screaming every time she hears a woman say she doesn’t have enough money to invest. 

The last myth is the one nobody says out loud, but women, especially, believe it: They think someone – a husband, boyfriend, financial adviser or father – will take care of them financially. Men, likewise, shouldn’t rely on others – such as their lawyers, brokers or the president – to take care of them.

Barbara reminds Zoey that, on average, women earn 20% less than men, and that lifestyle changes – corporate downsizing or taking time off to care for children or elderly parents – affect women more severely. Women have 34% less than men in their retirement accounts because of these factors. Financial problems can compound for women because they live longer than men by an average of seven years, and half of all marriages end in divorce.

“Far too many women suddenly wake up one day to find themselves alone, broke, all their options behind them, and thinking, ‘How the hell did I end up here?”

Zoey meets Henry a few days later. They go through her daily expenses, which add up quickly. Her total spending on food and drink amount to $29.75 – including $4.50 for her morning latte, $2.75 for her breakfast muffin and $14.00 for lunch, among other charges. Zoey could invest some or all of that money – her latte factor – into a retirement account. How much, Henry asks, could she save by bringing food and beverages from home?

Zoey decides to give Henry’s suggestion a try. She isn’t fond of cooking, but thinks she could clean out her closet to sell clothes, and eliminate cable channels she and her roommate didn’t watch. Her $29.75 per day would add up to $4,110,652 if she deposited it in a pre-tax retirement account earning 10% interest for 40 years!

Financial freedom means living richly now.

Zoey returns to Helena’s to find out Henry’s third and final secret. Henry realizes Zoey isn’t particularly excited about saving for retirement because it is decades away for her. He asks what was important to her right now. Zoey tells him her dream of taking beautiful photographs. The photography class she wants to take costs less than $600, but, Henry points out, if she set aside $100 a month, she’d have enough money to take the class in six months.

When Zoey shares she also dreams of traveling, Henry tells her he took his first “radical sabbatical” 36 years ago when a friend asked him what brings him joy. At the time, Henry was a young architect working at a successful firm and had not thought much about the future. He turned in his notice and spent the next six weeks traveling the world taking photos. When he returned home, he took out a small business loan to lease a vacant storefront, which became Helena’s Coffee. His favorite photograph – and Zoey’s – is titled “Yes” because his wife, Helena, said yes to his marriage proposal in Mykonos.

After the “how” of paying yourself first and budgeting automatically, the “why” part of the equation is to live a rich life now. Zoey is intrigued, but still skeptical of Henry’s claims. She prepares to have an uncomfortable conversation with Barbara about leaving her job. At lunch, Zoey complains she’ll never be wealthy. She says she’ll always have student loan debt, credit card payments and high rent because she handles money poorly. Barbara challenges her. If they were to take a poll of the 100 or so people who had sat at their restaurant table recently, she asserts, maybe five paid themselves first. When Barbara asks Zoey to describe the lifestyle of a millionaire, Zoey replies that a millionaire is someone who spends money on luxury items.

“By and large, the wealthy spend their money on things that truly matter to them – no more, no less. It’s the unwealthy who spend money on frivolous things.”

On the contrary, Barbara insists, it’s non-wealthy people who behave that way. Your next-door neighbor, your plumber, a coffee shop owner or your boss are more likely millionaires, Barbara says. Barbara herself learned Henry’s lessons from her own parents, and has followed the three rules since earning her first paycheck. Zoey is shocked to realize Barbara is likely a millionaire. She asks why Barbara continues working if she is rich. Barbara replies that she loves her job and the people she works with, including Zoey.

Zoey re-examines her life. Her mother, who is battling pancreatic cancer, makes Zoey promise to live her life to the fullest. Zoey declines Jessica’s job offer and continues to work for Barbara. She sets up her 401(k) and opens two new savings accounts at her bank, one for her photography class and one for travel. After her mother passes, she and her father buy a small duplex in Brooklyn. She is able to take her photography class six months after she started saving, as Henry had predicted. Her credit card debts take a little longer to pay off, and she is still working on her student loans, but she is making progress. Three years later, Zoey brings her camera to Mykonos.