Morning coffee versus savings

The latte effect and its power have been investigating for a dozen of years by Americans. For many years now, David Bach, journalist and author of financial publications, has been convincing USA citizens that resignation from purchase of morning coffee, sandwich or cake and saving their cash equivalent will result in accumulation of a million dollars after dozens of years. How does it work? The aforementioned small amounts saved on a regular basis, cumulate at the end of the week, month and year into real big money. This reminds of a snowball effect where a snowball keeps rolling and grows in mass.

We are not aware how important regular saving may be. When consistently saved up every day, after 20 years, even 10 PLN will grow up to 73 thousand PLN. Certainly, these funds will be higher accordingly, if we decide to deposit them on a savings account or if we open a term deposit. Then we would use the power of compound interest – notes Marek Ubysz, head of the Savings Products Subunit at Bank Millennium.

This is supported by business psychologist, Dominika Maison, author of the book "Pole in the world of finance". – Unfortunately, a lot of people are not future oriented, they are not forward looking, they count on a miracle or some windfall support. Therefore, still so few Poles put by money, for instance, for their retirement.

Coffee and regular saving

Latte coffee featured in the term coined in by David Bach is obviously only an example. The unnecessary and often uncontrolled depletion of our wallet is caused, among others, by frequent purchases of cigarettes or eating out. Generally speaking, the late effect covers all the expenses we can easily live without.

Nevertheless, it should be highlighted that spending money on our little pleasures is not necessarily bad. The key is whether a given person can afford such expenditure. There is a thin borderline between rational spending and falling into debt – points out Dominika Maison.

What David Bach consistently reminds us about is the fact that in order to check out the power of the latte effect it is not enough to resign from our small expenses. The funds saved in this manner should be deposited on an account or a term deposit. Otherwise, our extra "pocket money" will be spent on another occasion. This is the point– saving is not about shuffling expenses from one pool to another, but it is about elimination of expenses. Certainly, it does not mean that one should live the life of an ascetic. The gist of the latte effect is to see sense in consistent saving of small amounts. Coffee latte, which is an everyday expense for many of us, is simply its ideal illustration.
 
Small great effect

During the crisis of 2008 a lot of Americans had to learn how to rationalise their spending. At that time, the latte effect was put to work in a rather literal manner affecting the performance of the café business – one of the largest chains explained closing its 600 outlets with the latte effect. Nonetheless, this effect has a much wider application – not only in the U.S. and not only in the time of economic stagnation. Do we need a crisis to note what tangible results the systematic saving yields?

Dominika Maison believes that it is not the case. – Saving is to a higher extent related to psychological makeup of the person and his character, rather than the amount of funds the person holds. Our income may, at the very most, shape the size of our savings   and not the saving habit proper. The research shows that saving is supported by, among others, such characteristics as self-control, ability to delay rewards and even life satisfaction. It turns out that persons with higher level of life satisfaction are more effective in saving. The reason may be that with a positive attitude, we believe more in effectiveness of our actions and it also holds true for our saving behaviour.

Saving efficiency is also enhanced by defining a specific goal for which we intend our savings. Our customers open even a few target accounts each, where they can assign their savings to anything – car, tablet, holidays or renovations. This mechanism increases effectiveness of saving as the saving person may constantly watch as he approaches his longed-for goal – points out Marek Ubysz from Bank Millennium.

On your way to one million

For thousands of Americans, such a goal is the mythical million dollars – the longed-for goal of the latte effect. They take up the challenge to save up this amount and share their experiences in the Internet demonstrating that regular saving does not imply self-denial at all.

In this area Poles may work out lots of their own simple solutions to reduce regular spending. You may make your sandwiches at home instead of buying them out or at the office, you may purchase one larger packaging instead of a few smaller ones, you may do your shopping once a week in a supermarket rather than every day at a more expensive convenience store or make your coffee in the company coffee machine instead of buying the same beverage in a café – and these are just a few easy saving ideas. We may also combine saving with another contemporary problem – food wasting. If only we could buy approximately as much food as we need, we would avoid disposal of the surplus. Thus we win in two ways – we save and spend less on the next shopping.

You should remember that the American society is relatively affluent and more consumer-oriented than the society in Poland and therefore the savings from the latte effect result in huge benefits for the US population. Nonetheless, it does not mean that – for those who live in Poland and know the phenomenon - taking up the challenge of regular saving will come unnoticed – indicates Marek Ubysz from Bank Millennium.

The benefits of optimisation of minor but frequent expenses may be enjoyed almost every day. What is more – if we do not buy cigarettes, use a well thought-out shopping list, in contrast to compulsive shopping, or if prepare our meal at home rather than use a fast food chain, it will be good for your wallet and it will be not the only benefit you will get. So it is a worthwhile effort to review your expenses – be it in times of recession or rampant consumerism. We only have to remember to channel our latte effect savings to an account, deposit or any other place where they can safely yield future interest.