This Advice on Paying Debt Was Hot in 2004 — What Financial Experts Say Today
A lot has changed since 2004, but one thing has stayed the same — people are still searching for ways to pay off debt. Many fads came and went during the early aughts, including those related to money.
One of the most memorable debt repayment strategies hit the air in 2004, when David Bach appeared on “The Oprah Winfrey Show” to discuss his book “The Automatic Millionaire.” During the interview, he introduced the latte factor, which argued that spending money on small daily luxuries — i.e., lattes — can add up to a substantial amount over time, according to his website.
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In recent years, the latte debate has resurfaced — and it’s become heated. While many stand by the advice of continuing to skip little luxuries, others argue that lattes aren’t what’s keeping millennials from achieving milestones like buying a home.
MoneyLion asked two financial advisors to weigh in this advice. Keep reading to find out if they believe it’s still relevant or not.
Moderation Is Key
For the most part, Jovan Johnson, certified financial planner (CFP) and partner at Piece of Wealth Planning, still agrees with the advice on skipping little luxuries. However, he said there are more factors to take into consideration today than in 2004.
“We have access to far more convenience and spending options than we did 20 years ago,” he said. “From food delivery services like DoorDash to online shopping and subscription services, it has become incredibly easy to spend money without giving it much thought.”
While he doesn’t endorse overindulging, he believes many people have changed their money mindset. It’s not uncommon for people to want to enjoy small luxuries while working to achieve their financial goals, which isn’t necessarily a bad thing, he said.
“Every financial decision doesn't have to be based purely on dollars and cents,” he said. “Your overall well-being and happiness should have a place in your financial plan as well.”
To make little luxuries affordable, he recommended working them into your monthly budget, while still prioritizing debt repayment.
“In some cases, it may make more sense to focus on cutting back on larger expenses and luxuries, such as expensive vacations, fancy cars or constantly upgrading to the latest iPhone or other technology,” he said. “Reducing one large expense can sometimes have a much greater impact than eliminating every small purchase that brings you some enjoyment.”
Ultimately, balance is the key to debt repayment, he said. It’s impossible to be intentional about eliminating debt, without feeling like you must put your entire life on hold.
Other Ways To Pay Off Debt
Whether eliminating little luxuries is part of the plan or not, debt payment must typically involve spending intentionally and earning more, said Kevin C. Feig, CFP, certified financial therapist and founder of Walk You To Wealth.
“This may mean addressing the age-old ‘latte factor’ — or much larger expenses,” he said. “For example, one client eliminated [savings] close to $2,000 [per] month by discontinuing food delivery services like UberEats.”
Since the potential is limitless, he said earning more money is even more important than intentional spending.
“The key is to use your active income to pay down debt or rebuild your assets at a faster rate,” he said.
One of the keys to success is viewing high-interest debt repayment an investment opportunity, according to Feig.
“It's the only investment with a known 20%-30% return — the typical rate on credit cards,” he shared. “Paying it off also offers tremendous psychological benefits.”
Additionally, he stressed the importance of being slow and steady with your debt repayment approach. Following the avalanche debt method or the snowball debt method may work but will require time and patience, he said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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