The “latte effect” of the go-go years had consumers spending $4 a day on coffee. Now the downturn is forcing them to rethink the wisdom of such habits.
As inflation squeezes budgets, middle-class Americans are taking fresh stock of their spending in search of ways to save a nickel or a dime. The result: People are giving up a variety of small financial vices.
For Michelle Hovis, that means refilling her husband's used soda container from a 2-liter bottle she buys on sale for 98 cents. She tweaked his daily habit of buying a 20-ounce bottle when the price crept up to $1.39.
“The price of gas, milk, eggs – everything you can't control – is going up. So you need to watch the things you can control,” said Hovis, a 31-year-old stay-at-home mom from Lincoln County.
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While the idea that little costs add up is nothing new, it comes with added sticker shock as food and gas prices sprint along at a record pace. The result is that people are finally putting the brakes on vices once considered necessary – like frappuccinos.
Milk, coffee, fresh fruit and bread were among the items that got more expensive by an average of 0.9 percent in April, the largest one-month increase since January 1990. Gasoline prices were up nearly 21 percent compared with a year ago.
Workers' wages, meanwhile, dropped for the seventh consecutive month.
The result is fewer latte runs. Literally.
Last month, Starbucks Corp. blamed rising food and gas prices when it reported a 28 percent drop in second-quarter earnings, and said sales at U.S. stores open at least a year had dropped — indicating some may finally be summoning their inner Scrooges. Coca-Cola Enterprises Inc. also said last month that weak U.S. sales – especially on some 20-ounce beverages – will likely cause its earnings to drop
Consider the jaw-dropping math behind “the latte effect” in today's economy.
A $1.50 bottle of soda for each weekday of the year, for example, would add up to about $390. Now at $2 in some parts of the country, the habit comes with an annual price tag of $520. Over five years, that's $2,600.
This is the point where a financial planning guru might multiply the cost out for decades, demonstrating how a carbonated beverage is quietly robbing you of your retirement. Except now it's consumers crunching the numbers and agonizing over their wasteful ways.
“Unfortunately, pain is required for change. The pain of the uncertain economy, of gas prices and food prices, is becoming an important reality check,” said Sheryl Garrett, a financial planner based in Shawnee Mission, Kan. That means people aren't eating out as often or spending as much on clothing and vacations.
Cutting back doesn't have to mean a joyless existence, however. Simple measures like using cash instead of credit cards can make people more conscious of how much they spend, financial planners say. Taking a few hours to scan cell phone and cable bills for unnecessary charges can save, too. Shopping around for better deals when contracts run out is another good idea.
“Most people are not even conscious of how much they spend,” said Laurie Hensley, who teaches a course on personal finance at Cornell Uni