Recently, on an episode of my radio show, "Your Money," I spoke with Helaine Olen, author of Slate's the Bills column, which looks at the intersection of money and life. She also wrote the popular book "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry," published in 2013.
In her book, which pulls back the curtain on the oft-misleading personal finance industry, Olen denounces "The Latte Factor" -- coined by personal finance guru David Bach -- or the common idea that one can become rich by not spending money on little excesses, such as Starbucks lattes.
"I researched the term and found that it was completely and utterly untrue, based on faulty math, faulty logic and didn't account for everything from taxes to inflation to how people really spent their money and what living in the United States, which has a very precarious social safety net, really does to all of us."
I agree with Helaine. If you simply do the math, a few extra dollars a day certainly doesn't hurt, but it's not going to move the needle substantially for retirement savings.
So how has this misunderstanding affected current savers? Do people really believe that if they save an extra $5 a day they'll live a life of luxury or become the next Bill Gates?
No, Helaine said, but it makes people blame themselves for what are essentially bigger factors impacting their lives, like the spiraling cost of health care, education and housing.
"It plays on this myth that there was this past when we were all frugal and careful with our money and now we're using our credit cards to go on wild shopping sprees and it's our fault if we have no money."
Obviously, spending exorbitant amounts of money on shopping sprees is not a good idea, but there is little evidence that shows that this is widespread, Helaine said.
Because of stagnant salaries, people can't keep up with the rising costs of health care, housing and education. For example, students are graduating from college with roughly $30,000 in debt if they borrow money, which over two-thirds of them do.
Americans have also historically had a fairly low saving rate. Over 3 percent is a common figure we see. Helaine puts that number at closer to 6 percent - a high not seen since the mid 1980s - in part because it has become more difficult to get credit. People relied heavily on credit over the years as salaries stagnated.
Helaine offered some sage advice to the average saver:
- Stop walking around with a credit card. In fact, don't use plastic at all. Data shows that we spend more with debit cards than when we part with cash, which is surprising.
- Try making your savings automatic. Put aside at least 10 percent (between your employer contribution and yours) into a 401(k) followed by low cost index funds. Try not to touch that money. Act like it's not even there.
- Stay away from anyone who has a great money-making scheme for you. "Those people contact me all the time," Helaine said. "As I always say, if it's so great, why are you telling me and not Warren Buffett?"
"The idea that we're all individually, one-by-one, going to tighten our belts as things are marketed to us incessantly and costs go up is a non-starter," she said.
Kent Smetters is the Boettner Professor of Business Economics and Public Policy and faculty director of the Penn Wharton Public Policy Initiative at the Wharton School of the University of Pennsylvania.