Fighting Financial Guilt In The Era Of Latte Shaming
Don’t let provocative news cycles make you feel bad about buying coffee every morning. You can have your $5 latte and still meet your financial goals, using reverse budgeting.
Despite a healthy economy, some Americans are drowning in a sea of money anxiety.
All this worrying accomplishes little—and may even divert us further from our financial goals. Getting hung up on the small expenses that make up our spending only exacerbates the problem.
To help build financial security without all the hand-wringing, try reverse budgeting instead.
In the good old days, people would often blame a case of the jitters on their morning coffee. Then came the “latte factor,” which popularized the notion that this ritual could mean the difference between prosperity and financial ruin. Ever since, the average $5 daily price of a cup has probably caused more coffee-induced anxiety than the 150 mg of caffeine itself.
Unfortunately, no amount of worrying about spending will fund retirement. Worse, it can take a toll on quality of life and mental health.
So, is there a way to ditch the financial guilt without suffering eternal caffeine withdrawal? Reverse budgeting could be just the solution.
Financial Stress Hurts
Money is the leading cause of stress for Americans, according to a recent study. Never mind that the U.S. is experiencing its second longest economic expansion in history. Half those surveyed consistently experience anxiety, insecurity, or fear about their finances. Healthcare costs and unexpected emergencies topped the list of concerns, with income, savings, and debt not far behind.
All this angst is adding up to something bigger, too. About 40% of respondents cited money-related problems with spouses, family, and their larger social network. More than 1 in 4 reported experiencing mental illness at least monthly.
With the cost of treating such disorders so high, financial stress sets up a vicious cycle, draining resources and peace of mind.
As you can see, there’s little upside to financial stress. But if demands for your cash always seem to exceed supply, how can you not worry? That’s where reverse budgeting comes in.
Reverse Budgeting Can Help
Reverse budgeting takes the “little things mean a lot” emphasis of the latte factor and flips it on its head. Rather than asking you to deny yourself that iced coffee, it takes a top-down approach that focuses on big-ticket items and paying yourself first.
Step One: Make conscious choices about how much to allocate to large, recurring priorities. That typically includes savings, housing, car, tuition, etc.
Step Two: Do the math to determine how much is left for everything else.
Step Three: Stop spending until the next paycheck once that money is gone.
Essentially, reverse budgeting lets you have your cake and eat (at least some of) it too. That might sound too good to be true, but here’s why it can work.
- It uses systems to safeguard long term goals.
- It sanctions a particular level of spending on current lifestyle. That means fewer of the binge/purge cycles that often accompany austerity measures.
- Spending decisions that match desired behavior are effectively pre-made. This reduces the decision fatigue that encourages budget-busting impulse buys.
- It adjusts to your changing tastes. After all, what difference does it make if you spend on lattes in March, yoga in April, and a Spotify subscription in May?
- It allows for extenuating circumstances. If your best friend is visiting for the first time in years, you might skip the month’s spa treatment for a night on the town.
- It reins in lifestyle creep by requiring the extra manual step of transferring money.
In short, reverse budgeting minimizes the mental bandwidth needed to manage your money according to your values.
Systematizing Is Key
Reverse budgeting manually is a great start, but automation is what can really make it an effective strategy. The idea is to set up a system that automatically performs repetitive tasks and pushes you to make good spending choices.
An efficient reverse budgeting system contains several key components, many of which you may already have in place. In that case, you simply need to modify the way you use them to support your new money management model.
Central to this system is using your checking account for big ticket items. Don’t forget to seed your account with a cash cushion large enough to prevent overdrafts. Some reverse budgeters like to keep this amount small to act as a check on spending.
Managing your finances with a partner? Consider keeping separate “everything else” accounts to minimize coordination of efforts. Side benefit: it might also increase marital harmony by skirting disagreements over spending.
Next, you’ll need to set things up so that money moves where it needs to go with no intervention on your part. That includes:
- direct deposit of paychecks into your checking account,
- automatic transfer of predetermined amounts from there into your savings, investments, and
- automatic payment of big ticket items and other recurring expenses.
You can earn even more over time by automatically shifting surplus cash to vehicles with better expected rates of return. If your financial institution supports it, have the excess cash in spending accounts swept into a higher yield account. Better yet, automatically invest funds to ensure you dollar-cost average rather than trying to time the market, often a detriment to returns.
The final step is setting up daily alerts to keep you abreast of how many more lattes your “everything else” accounts can support this month.
With that, you’ve outsourced the bulk of your money management to technology, a resource perfectly suited to the task.
All that’s left for you to do is periodically tweak the system as your personal financial situation evolves.
Leave Your Guilt In The Past
Don’t let those latte shamers get to you. Reverse budgeting is a simple, elegant method for building long term financial security without constant hand-wringing over daily spending.
It strikes and maintains just the right balance between long term financial goals, priority expenses, and life’s little indulgences–per your family’s priorities. Now, all that’s left for you to do is relax, sit back, and enjoy the elixir of your choice.
How to Do a Direct IRA Transfer
If this is your first direct IRA transfer, don’t worry. We help process direct IRA transfers every day, and we’re here to make it as easy for you as possible.
Consider This Your Financial Roadmap
Separating your money into the categories of now, soon, and later can help you see a full picture of your financial roadmap.
Goal Projection and Advice Methodology
Betterment helps you get on track to meet your goals by providing projections and advice on allocation, savings, and withdrawals. Our methodology for doing so involves some assumptions worth exploring.
Explore your first goal
Our high-yield account built to help you earn more on every dollar you save.
This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.
Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.
If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.