I love a good personal finance book. Even when I'm reading about theories that I already know and put into action, I find re-reading personal finance books motivating which, in turn, helps me to find new ways to free up more money for investment.
If you've been reading along with my journey, you know I'm a single mother. My values include being present in my daughter's life. That means picking her up from school, volunteering for field trips and helping with programs the school runs that require parents to pony up some time.
That has meant a trade-off in terms of income. When you trade time for money; the less you work the less you generally earn.
Unless you focus on building passive income streams. What many don't contemplate is that you can trade money for money also; by investing.
Passive income comes in many different flavors. As many as there are latte flavors.
I have chosen dividend growth investing as my favorite flavor of passive income. When it comes to latte's, however, it's Starbucks (NASDAQ:SBUX) seasonal offering; a pumpkin spice latte.
So, what does a latte a day have to do with my investing milestone? Well, I'm glad you asked. I guess if you're not curious, you've hit the back button by now.
What is the Latte Factor?
The Latte Factor is a well-documented personal finance thesis about saving and investing money that David Bach features in his training and his best-selling book, The Automatic Millionaire. I love this book. The investment principles may not be the most complex, but it takes a topic that many have hang-ups about, money, and makes it simple. And well, as the title implies, automatic.
The argument is that with small regular amounts of money invested anyone can build a secure retirement. The amounts are so small that often we already spend an equivalent amount daily. For example, a morning coffee on the way to work. Let alone the muffin that goes with it, or buying lunch and a snack here and there. We work hard so we deserve these little treats; don't we?
The irony, of course, is that the very thing that we do to get us through the work day, small regular treats for our commitment to earning an income are the very things that could be preventing us from being financially free. Given enough time that is.
Investing One Latte a Day at a Time
The math is quite simple. Take the cost of your morning Latte, Mocha, Espresso, Chai or whatever you buy to start the day. For me, in Australia, it's about $4 for a skinny cappuccino. Now work out how much you are spending on that coffee each year.
$4 per day x 365 days per year = $1460 a year.
It's important to stop here and truly think about this number. I have had conversations with many people; young and starting out, middle aged and worried about retirement, single mums with limited income about how I build my share portfolio.
For my Australian portfolio, I buy stocks in $1500 lots; or thereabouts. Brokerage is a hefty $20 per trade. And brokerage is essentially a fee that we all know eats into your investment return. For that reason, I try to try keep brokerage under the 1.5% of each share bundle purchase. So, $1500 share bundles it is.
Or, roughly the cost of 1 coffee per day for an entire year.
When you earn a modest income, $1500 per purchase can seem large and overwhelming. When you break it down to $4 a day for a year, it's easy to see how sacrificing the fancy coffee each morning makes it possible for you to buy an income stream each year. Even if you are on a tight budget.
After a while, it becomes a game. When your mind is tuned in to how far $4 a day can go, you start to see other opportunities to save. For me, I also brown-bag my lunch and I stopped buying the expensive share investment magazines I like to read. While my daughter is at dance class I go to the library, and read the latest issue for free, taking notes as I go. There are of course many other ways to save, limited only by your imagination.
As a result, I find I am investing more than one $1500 bundle in a year, even on an income that must more than double to leave five figures behind.
The Latte a Day Milestone
This month, my Australian share portfolio, built of these $1500 bundles, passed a milestone.
I started building a share portfolio by giving up my $4 a day coffee habit. I now brew a little extra coffee at home and take it in to work with me. And I don't feel like I'm sacrificing anything.
I buy an organic fair-trade blend that I truly enjoy. And since I drink my brewed coffee black (with just a little sugar), it has health benefits also; 16 calories vs 200 calories for my preferred latte option.
Today, as I was walking around the office sipping on my home brewed coffee, I received a notification on my cell phone that a share purchase order had executed. I'd place the order a couple of weeks ago, at the price I wanted to buy the stock. This morning the order was filled.
I generally have a few such orders placed so which company I bought was a surprise.
When I added the dividend income that share purchase would add to my dividend income stream going forward a familiar number popped up in my spreadsheet.
My forward 12 months' dividend income including that purchase is now $1462.10. If you divide $1462.10 by 365 days per year, you get $4 a day.
My share portfolio now spins off enough income to BUY me a latte a day.
There is something poetic about that share purchase - Retail Food Groups (ASX: RFG) - a company that is the franchiser and owner of coffee shops, bringing my dividend income to the latte a day amount where this journey started.
Another Latte a Day?
But that isn't where this story ends. Again, if you have been following along, you know that I have two distinct portfolios; a US portfolio; and it's the Australian one that can now buy me a morning coffee.
A quick look at my US portfolio's forward 12 months income and it too is sprinting towards the same milestone. I'm going to assume for a moment that I would spend US$4 a day on coffee there too. Not so big a stretch given that I enjoy the seasonal but expensive Pumpkin Spice Latte while its available but tend to favor cheaper coffees the rest of the year.
Will it be Starbucks that pushes me past that milestone for my US Portfolio? I guess we'll have to wait and see.
So, Will My Portfolio Buy Me A Latte a Day?
I could go back to buying my morning coffee. And I would be ahead since my share portfolio would now "pay" for it. Instead, I will continue to use my original $4 a day to buy more shares and I will reinvest that $4 a day dividend income. That is the magic of compounding.
Achievement of a milestone deserves a reward, however. One that is proportional to the milestone. So how will I celebrate my latte a day milestone? Well that's easy. I think my daughter and I will go on a "coffee date" together. A skinny cappuccino for me, milkshake for her and a chocolate muffin to share.
Giving up my coffee a day habit has paid dividends for me (yes, the pun is intentional). But if it's part of your morning ritual that you cannot or do not want to give up, I'm okay with that also. There is a fair chance that you will be building my Starbucks and Retail Foods Group dividend income streams with each purchase you make. And for that, I thank you.
Disclosure: I am/we are long SBUX, RFG(ASX). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.