By Katie Frazier, CFP®

Key takeaway: We are taught to save money by spending less. Spending within one’s means is, of course, a virtue. But the idea that you can save your way to every goal you want by making, not buying, your daily cup of coffee doesn’t prioritize your thoughts. Focus instead on a growth mindset, and grow your income.

After I graduated college and entered the “real world,” I read personal financial blogs a lot. I didn’t know how to prioritize my spending, but I knew I wanted to have financial freedom.

Often, a theme of these blogs was how frugality can help you build wealth and reach your goals. To some degree, these blogs would tell the reader to cut out daily extravagances, such as brown-bagging their lunch instead of going out to eat, reading or spending time outside instead of subscribing to cable or a streaming service such as Netflix or Hulu, or making their daily coffee at home rather than going to Starbucks.

The last of these examples is referred to as the “latte theory,” which suggests you can take the money saved from cutting out these daily expenditures like your coffee and sock it away in a savings account. After 30 years of compounding and investment returns, you would be richer and in a better financial position.

Some blogs even suggested the idea that if you cut out enough expenses, not only would you have more cash to save for your retirement, but you would also lower your lifestyle standards to a level where you would be used to living on less. The combination could enable you to retire decades earlier than the norm.

I used to buy into this theory and became an extreme penny pincher in my 20s, hoping I could cut enough out of my budget that I would amass a fortune in my bank accounts and investments while earning a modest salary. In some ways this was good as I knew exactly where every dollar I earned was going and could reach certain financial goals sooner than if I had been less strict with my budget.

At the same time, I personally (and I’m sure many people) find budgeting like this exhausting. A lot of times I wished I could just go get my $5 coffee even if it was basically milk and sweetener, because that’s what would make me happy in the moment.

Years later, I’ve moved away from this penny-pinching way of life and have come to realize something: The latte theory, or whatever other adjective you want to use to describe it, is hogwash.

The problem with the latte theory is twofold: (1) The theory only works if people have the diligence to actually take the $5 that would have been spent daily on coffee and set it aside in savings versus other mindless spending. (2) Depriving yourself of small “wins” like getting a coffee in the morning (or whenever you like that caffeine boost) can actually demotivate you from focusing on improving your situation (notice I say “small wins”—I am not advocating for constant shopping trips).

Living within your means and saving the difference between what you earn and what you spend is the basis for a successful financial life. This is indisputable. But I don’t think most people with modest incomes can coupon-clip their way to being a millionaire.

I think rather than focusing your energy on ways you can cut back spending even more, you should instead focus on making more income. The higher your income, the larger the difference between your income and your cost of living. The higher that difference, the more you can save and the faster you can accumulate wealth, which I’m going to bet is a faster method than saving your coffee money and investing it. It’s also a more enjoyable way to live.

Katie Frazier, CFP®, is an Associate Wealth Partner with a passion for helping clients meet their financial goals. Outside of work, she is busy raising a family and working on HGTV-inspired home projects.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.

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