If you love your morning Starbucks, Sallie Krawcheck wants you to enjoy it.
“There’s this terrible advice that goes around: ‘Don’t buy the latte. Invest the money, and you’ll become a millionaire,’” the former Wall Street executive tells CNBC Make It. “There are layers of things that are wrong with this.”
Krawcheck is referring to what’s known as “the latte factor.” Some financial experts argue if you ditch your $5-a-day latte habit — or any small luxury you indulge in on a regular basis — you’d have quite a bit of money to contribute toward investing instead. Over the course of a few decades, that money could grow substantially, and even make you a millionaire, thanks to compound interest.
It would take a lot of coffee purchases and a high annual return (10-12%) to turn your latte savings into $1 million, says Krawcheck, who now runs the digital investment platform Ellevest.
Her bigger point, though, is that you don’t have to eliminate small luxuries like store-bought coffee to meet your savings goals and stay on track financially. Instead, follow the 50-30-20 formula: 50% of your income should go toward your needs, 30% toward fun and 20% toward savings.
By Krawcheck’s rule, nearly one-third of your money can be spent on whatever makes you happy. That could be travel, electronics, clothing or daily lattes. “We’re only on this earth a short amount of time,” she says. “We need to have fun.”
Don’t get hung up on the idea of cutting back on small purchases, she adds. Focus on the bigger, societal inequities, like the wage gap, the pink tax, the student loan debt crisis and the investing gap. “We’re sitting here talking about lattes, when, with young women, we really do need to acknowledge the gender pay gap that exists,” says Krawcheck. “Our efforts need to be put into changing the inequities, as opposed to making people feel this sense of guilt and shame over having a lovely cup of coffee in the morning. “My message to young folks is: The inequities do exist. Fight against them. Let’s fight for paid, mandated maternity leave at the country level. Let’s fight to close those gender pay gaps. And while we’re doing that, enjoy your latte, please.” Disclosure: Invest in You: Ready. Set. Grow. is a financial wellness and education initiative from CNBC and Acorns, the micro-investing app. NBCUniversal and Comcast Ventures are investors in Acorns.
Kathleen Elkins, CNBC Recommended
