It’s a basic fact of life that many of the things that we come to accept turn out to be wrong.
Take the myth of the "latte factor" popularised by David Bach in the late ’90s, that we could resolve our financial woes by simply eschewing a daily coffee at Starbucks.
To be fair, Bach didn’t just blame the latte. The treat stood for all the small, regular luxuries that get us through the day.
And Bach was only one of a group of personal finance gurus who argued that the wealthy are the wealthy because, unlike you or me, they don’t waste their money on frivolities.
There was only one thing wrong with the argument: it wasn’t true. The problem was much more complicated than that.
Joseph Cohen, an assistant professor of sociology at Queens College at the time, showed that between the mid-1980s and the mid-00s, Americans’ spending on clothes, alcohol, tobacco and cars was in decline. Overall expenditure on food also declined.
Instead, Americans spent almost 20% more on housing and 32% more on health care, with health insurance more than doubling and a 41% increase in pharmaceuticals. Education increased an astonishing 60%. Petrol went up 23% and vehicle insurance 29%. Housing, health care and education cost the average American family 75% of their discretionary income in the 2000s. The comparable figure in 1973: 50%.
"What’s killing people are not the small luxuries," concluded Cohen. "It’s the fixed costs, the things that are difficult to cut back on."
A problem that would appear to be very much with us today.
To quote columnist Helaine Olen: "We continue to discuss our financial woes as though we only have to give up a few habits to solve our chequebook woes. It’s a nice fairy tale, but it’s not true."
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