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The “latte effect” of the go-go years had Americans spending $4 (R32 at current exchange rates) a day on coffee. Now the economic downturn is forcing them to rethink the wisdom of such habits.

June 25, 2008

By Candice Choi

New York – The “latte effect” of the go-go years had Americans spending $4 (R32 at current exchange rates) a day on coffee. Now the economic 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. The result: people are giving up a variety of small financial vices.

Michelle Hovis refills her husband’s used cooldrink container from a 2l bottle she bought on sale for 98c. She tweaked his daily habit of buying a (590ml) bottle when the price increased to $1.39.

“The price of [petrol], milk, eggs, everything you can’t control, is going up. So you need to watch the things you can control,” said Hovis, a stay-at-home mom from North Carolina.

Brakes on vices

The idea that little costs add up is nothing new, but it now comes with an added shock as food and petrol 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 became more expensive by an average of 0.9 percent in April, the largest one-month increase since January 1990.

Fuel prices were up nearly 21 percent compared to a year ago. Workers’ wages, meanwhile, dropped for the seventh consecutive month.

The result is fewer latte runs. Literally.

Last month, Starbucks blamed rising food and fuel prices when it reported a 28 percent drop in earnings in the second quarter. It said sales at US stores open at least a year had dropped. This indicated that some people might finally be restraining spending.

Coca-Cola said last month that weak US sales – especially on some 591ml beverages – could cause its earnings to drop.

Consider the jaw-dropping numbers behind “the latte effect” in the US economy today.

A $1.50 bottle of cooldrink for each weekday of the year would add up to about $390. Now at $2 in some parts of the country, the habit comes with a price tag of $520 a year. Over five years that is $2 600.

This is the point where a financial planning guru might multiply the cost out for decades, demonstrating how a carbonated drink is quietly robbing you of your retirement.

Except now it is consumers crunching the numbers and agonising over their wasteful ways. “Unfortunately, pain is required for change,” said Sheryl Garrett, a financial planner. “The pain of the uncertain economy, of [petrol] prices and food prices, is becoming an important reality check.”

That means people are not eating out as often or spending as much on clothes or holidays.

For New York City resident Natasha Patel, the penny pinching means no more taxi rides home on weekends.

Instead, she relies on her monthly subway pass, saving about $20 in taxi fares a week. This is $1 040 over a year, or $10 400 over a decade.

She cancelled her cable and internet package, pocketing another $120 a month, or $1 440 over a year.

“It makes you hone in on the things you really want to do, rather than doing stuff just because you can,” said Patel, an academic counsellor at Columbia University.

Taxis, mocha lattes and sports cable packages are not even options for those who are suddenly out of a job. Others who rein in pricey habits are seeing their savings gobbled up by mounting debt.

But even among the relatively comfortable, rising prices are upending habits they have long known were costing too much anyway.

Joyless existence

Cutting back does not have to mean a joyless existence. Simple measures such as using cash instead of credit cards could make people more conscious of how much they spend.

Scanning cellphone and pay television bills for unnecessary charges or shopping around for better deals when contracts run out can also yield savings.

“Most people are not even conscious of how much they spend,” said Laurie Hensley of Cornell University.

In some cases, the cost of all a person’s habits could add up to more than rent and transportation, she said. That is not to say the little habits will seal your financial fate. Mortgages, bad interest rates and credit card debt are likely to be bigger drains on your budget.

But when times are tight, it is a chance to review all spending, big and small.