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Living down the Lattes

posted by Katie Porter

Credit Slips is a virtual community so very few of you know that I go to Starbucks at least once a day, although a small detail in the pic here was a hint in that direction. It's not a cheap habit, as personal finance writers have observed here and here. But does it drive people to financial ruin, or even indicate a failure of sound financial habits?

I've never thought so. The decades of research on consumer bankruptcy show that the big 3--job problems, medical problems, and family changes--are underlying structural problems. My thoughts on the "latte problem" are now enshrined in print in Helaine Olen's new book, Pound Foolish. It's tone is largely that of an expose, which makes for fun reading, although academics may find some of the research a bit light. But part of the problem that the book reveals is the lack of innovative solutions to improve financial advice. Certainly the CFPB has undertaken this as a major part of its mission. I'd love to hear readers' suggestions for innovative (not more junior high financial education, please) ways to get people to be more critical "consumers" of financial advice and to take the time and effort to make strides toward their financial goals. In the meantime, I'll enjoy my latte and procrastinate on rebalancing my retirement portfolio!


Perhaps it's an issue of people misperceiving their own social class. A couple of studies written up in the The Atlantic and the NY Times show that most people think they are middle class. If you think that you are middle class, then one inference is that you will behave as though you are middle class.

If you're actually upper-middle class or truly wealthy, then a daily latte habit will not ruin you. On the other hand, if you are not actually middle class then taking part in middle class economic rituals - a daily latte, eating out, buying a new car every 36 months, etc. - will cumulatively lead to your economic downfall.

Arguably the problem with the daily latte is not the latte itself. Instead the problem is that people make less than they used to but aspire to the same level of material attainment. This is probably why I end up with so many clients who are confused about why they are filing bankruptcy and why they blow the US Trustee Means Test Guidelines for monthly expenses.

My take on the financial planning industry is that it is trying to distract people from the real reason that they are struggling financially. The problem isn't lattes, cars, investment strategies, or whatever some talking head is trying to shill on the unsuspecting consumer. Rather the problem is that the post-war American middle class ideal is unachievable for a growing number of people because of regressive economic policies, a failed political system that resembles an oligarchy more than a democracy.

For those of you who are wondering, Katie's exact quote was, "You can't latte yourself to bankruptcy. The bladder won't stand for it."

A really interesting 2013 study (sorry, I only have the lead researcher name: Cole) found that students, of all abilities, that took an additional maths course in high school experienced significant increases in asset accumulation and lower probability of becoming delinquent on credit card debt, declaring bankruptcy etc.

As the education chapter of Olen's book points out, few studies have found significant differences in behaviour among those that took a 'PF education' course in school or even college.

I remember seeing some studies showing positive behaviour resulting from late stage intervention (e.g. education on retirement planning provided by employers) but can't find them right now... anyone?

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