It seems like up until a few years ago, personal finance literature focused on getting people to give up overpriced luxury items like Starbuck’s coffee.

The argument went like this: if you buy 5 of those lattes a week at $4 each, that’s $1,040 per year you’re spending on coffee. If you contributed that $1,040 to your IRA instead, after 40 years you’d have $222,154. Therefore, giving up coffee will make you $222,154 richer. Case closed.

The math is alluring, but somewhere between theory and reality there’s a breakdown. My favorite retort to this kind of logic is the following from Reddit:

Lady: Do you smoke?
Guy: Yes I do.
Lady: How many packs a day?
Guy: 3 packs.
Lady: How much per pack?
Guy: $10.00 per pack.
Lady: And how long have you been smoking?
Guy: 15 years
Lady: So 1 pack is $10.00 and you have been smoking 3 packs a day which puts your spending per month at $900. In 1 year, it would have been $10,800. Correct?
Guy: Correct.
Lady: If 1 year you spend $10,800, not accounting for inflation, the past 15 years puts your spending total at $162,000. Correct?
Guy: Correct.
Lady: Do you know if you hadn’t smoke, that money could have been put in a step-up interest savings account and after accounting for compound interest for the past 15 years, you could have by now bought a Ferrari?
Guy: Oh. Do you smoke?
Lady: No.
Guy: Then where’s your f*king Ferrari?

Yes, the theory doesn’t quite hold up when you introduce human behavior into the mix, does it? Ramit Sethi, a personal finance author whose work I really like, derides the latte-based approach mercilessly. And he’s right–if you gave up lattes, smoking, or some other expensive vice today, you’re not really going to change your financial destiny decades out from now.

But what’s missing from Ramit’s and all the other (totally justified) takedowns of the latte theory is the reason why it doesn’t work. If you understand that, you’ll actually be able to leverage your lattes into real savings.

Equilibrium

When it comes to spending, people settle at a certain equilibrium, a kind of intuitive balance between income and expenses. Virtually no one in America keeps a budget in the true sense of the word. We’re all playing it by ear. Incidentally, that’s one of the reasons I like Ramit Sethi’s work so much: he teaches personal finance strategies that align with this way of managing money, and don’t require you to spend lots of time on budgets and forecasts.

People do the same thing with eating. Instead of counting calories, they just reach a balance point at a certain level of calories for the amount of physical activity they get. Instinct, in the form of hunger at certain times, takes care of the rest.

And just like eating blind can lead to unwanted weight gain, spending blind can lead to debt and lack of savings & investment. If you’re not keeping a budget, you have a partially-subconscious way of navigating your spending. You check your bank account balances regularly, you know what day of the month various bills are due, but you usually don’t actually sit down and do the math.

When you buy a latte, you don’t deduct $4 from some other part of your budget. And that means that if you forego that latte, you’re not adding $4 into some other column. Since you didn’t buy the latte, you’ll just end up spending the $4 on something else.

Your intuition for personal spending isn’t finely-tuned enough to accumulate the leftover latte money in your bank account. If you don’t believe me, try giving up lattes and see if you don’t spend the money elsewhere. I guarantee you will.

Making a Game out of It

If you really want to give up an expense like lattes or cigarettes in order to save that money, you need to come up with a game in order to develop that habit.

The best (but most time-consuming) way to go about it would be to substitute one habit for another. So if you are trying to give cigarettes, you could play it this way: Figure out how much each cigarette costs, or just assign it $1 for simplicity. Now, when the time of day or situation comes up when you would normally smoke one, put a dollar in a jar instead.

The point of a game like this isn’t convenience or simplicity. It’s structured this way so that you can see the dollars accumulating in your jar. This is what it takes to build good self-discipline, and substitution will develop those willpower muscles better than anything else.

There are other games you could invent, too. You could pre-pay your cigarette money into a savings account each week. So if you spend $150 a week on cigrarettes, set up an automatic transfer to savings each week of $150, then you won’t have the money for your smoking habit.

You could invent any game you want, but the important thing is to choose something so that you won’t drift back to your old equilibrium.