'Early Show' Swallows 'Latte Effect' as Economic Guide

     In their quest to find new ways to describe the economic slowdown, the media have found various creative indicators of a struggling nation.

      Add the “Latte Effect” to a list of economic illustrations that already includes increased spam sales, booming pawn shop businesses, slow RV and increased sweater sales.

      The July 21 CBS “The Early Show” re- introduced the “Latte Effect,” a 10-year old term that according to BusinessWeek’s Lauren Young is a way to describe how cutting back “on little things” can add up over time.

     “A lot of people, they like to start their day with a cup of coffee,” CBS correspondent Bianca Solorzano said. “But with a struggling economy more and more people are giving up little indulgences like coffee because the little purchases really add up. It’s called the ‘Latte Effect.’

     “Ah, the good things in life, pampering manicures, luxurious hair highlighting and delicious lattes – but buyer beware, when the economy turns sour, those sweet things are usually the first to go,” Solorzano said.

     Although financial advisors tell consumers not to overextend themselves with personal spending, encouraging people to avoid all spending could have a detrimental effect on the economy. Personal consumption, at 70 percent, is the largest component of U.S. gross domestic product, according to a survey by the Hoover Institute.

     Solorzano offered an anecdotal perspective from a small business owner, Cindy Eagle – who told “The Early Show” she is saving $40,000 a year.

     “This is Eagle’s sizable list of ways she’s downsizing,” Solorzano said. “She’s cutting back on everything – from gifts, to gas, to groceries. Add it all up – Eagle expects to save more than $2,800 per month and close to $40,000 over the next year. Eagle’s far from alone in thinking twice before buying.”

     Eagle’s incredible $40,000 annual savings might seem to be a little more than skipping out on a daily latte and a muffin. According to financial author David Bach, skipping out on a $5 per day expense (the average cost of a latte and a muffin) at 7 days a week adds up to $35 per week or $150 per month. He estimated that if you take those saving and invested them at a rate of 10 percent annual return, you’d come out $1,885 ahead in one year.

     Eagle’s $40,000 annual savings are just shy of the entire amount of the U.S. median household annual income at $48,201. But, Solorzano said saving money is as simple as a few minor cutbacks.

     “Young says there are a lot of easy ways to save, bring your lunch to work, check out DVDs from the library instead of renting, carpool at least one day a week and ladies – you could paint your own nails at home, ” Solorzano added. “It may be tough at first to pass on life’s little perks, but just remember small changes can add up to much bigger savings.”