How Much Does that Cost? (Part 2 of 2)

If it has been a little while since you have read part one, go back and review first. The reason is that I am not going to give any background or explanations. I am just going to pick up where I left off, as if you had just turned the page.

What’s a Dollar?

My previous focus and examples were about monthly expenses. If you decide to take on a monthly commitment to spend money you have to weigh the true cost in order to make a truly informed decision. But what about those one-time decisions? An extra buck or two here or there can’t really make a difference, can it?

Let me give you an example of what I am talking about. When I was a newlywed and in college my wife and I would go grocery shopping together. We didn’t like to spend any time apart that we didn’t have to (and we still don’t). What we didn’t realize was that it was also an opportunity to learn about each other, our spending habits, and to grow in our ability to come to a consensus on what is worth spending money on, and what is not.

I grew up in a home where we always bought brand name foods. She grew up in a home of buying things that were a great deal or were on sale. I remember wanting to buy Kraft American Cheese. She couldn’t see why I would pay an extra dollar to buy Kraft instead of saving a dollar and buying the store brand. I insisted that it was “worth” it. She was wise enough at the time to let it go. I have since come to my senses on my own.

Often now, when I hear my mind whispering “it’s only a dollar,” I have a different train of thoughts come through my head. The first thing that comes to mind is: Is it really only a dollar? Going back to the illustrations in Part 1 let’s see what one dollar is worth if it is invested instead of spent.

  8% 10% 12% 18% Actual $ spent
10 years $2 $3 $3 $5 $1
30 years $10 $17 $30 $143 $1
60 years $101 $304 $898 $20,555 $1

The Years Have Now Passed

It is interesting for me to be writing this now. My wife and I will be celebrating our 11th anniversary this week. So, ten years have now passed since we were having these grocery store conversations. Looking at the chart, if I had taken the extra dollar home and invested it instead of buying Kraft, I would likely have about $3 now. Doesn’t sound like much, but it is THREE TIMES as much as ten years ago. Two questions begin to scream inside my head.

First, would I have bought Kraft if it cost $6 and the store brand was $3? Would I have been willing to pay twice as much? No. My wife would have had a much easier time convincing me. But the reality is that I did pay twice as much. And twenty years from now I will have paid 17 times as much. Fifty years from now I will have paid 300 times as much. I will be paying for that decision, more and more, for as long as I live!

The Most Important Part

The most important part of this is that we don’t make just one isolated decision to spend an extra dollar. The reality is that we make these decisions often. I would guess that if you will take time to honestly assess your spending habits, you will find many times when such a decision is made. My guess is that most people make such a decision more than once a day. Even if there are only two times in a week that you spend/waste an extra dollar, that would be $100 dollars in a year. Now look at the numbers in the chart above and multiply them by 100. Then multiply them by years of such decisions. Scary. Mind-boggling.

I will end by saying that there are many $1 decisions that I still think were worth it. Most have to do with experiences with my children and memories that were made. However, I know that there are innumerable $1 decisions that I have made that were not worth their true cost, and I will have tens or hundreds of thousands of dollars less in retirement because of them. Now that is expensive cheese!

How Much Does That Cost? (1 of 2)

“We just got a subscription to Dish Network. We need a way to relax and we figured that it is only $33 per month out of our budget. We deserve it, and it’s really not much money.” I am confronted with a variation of this comment much more often than I would like to be. If it’s not satellite TV it’s high speed internet or cell phones or DVD rental programs or . . . you get the idea. I usually smile politely and nod my head. I don’t want to confront people with the thoughts that are passing through my mind. But I feel like I need to get at least one of those thoughts out there before it bursts out unexpectedly.

You have every right to spend your money

Before I go on, I want to make it clear that your budget is exactly that – your budget. I claim no right to decide or even influence how you spend your money. When clients come to me for help with their budget they often expect me to tell them what to cut. I won’t do that. All I do is help them organize their spending into categories, compare their spending to their net income, and then go through each category one by one. As we discuss each category I help them decide for themselves what is worthwhile and what is not. My opinions do not enter the conversation, at least as much as I can help it.

However…

That said, I do want people to really think about the true cost of each expense. When we spend our money we rarely think about the full cost of the item – we usually only notice what is on the price tag. Each dollar we spend is a dollar that we didn’t save. That is ok. We have to spend money to live, and we can spend money to live comfortably as well. The goal is not to be a miserable miser. (Have you ever noticed that those words have the same root?)

How much does it cost . . . really?

So, prepare yourself to hear from the financial planner/accountant that is inside me. I will now allow you into my brain to experience the thought processes that I go through in making a long term buying decision. In this example I will imagine that I am trying to decide if it is worth it to me to spend $33 per month on a Dish Network subscription.

Let’s start with the easy math. $33 per month x 12 months = $396 per year. When I am deciding to take on (or eliminate) a monthly expense, the first thing that I do is turn that monthly amount into a yearly price. For some reason $400 per year seems like a more significant decision than $33 per month, and so it makes me weigh the decision a little more carefully. (By the way, marketers know this as well, and have almost perfected the science of monthly pricing.)

Next I will sometimes turn that yearly amount into a multi-year amount, if that applies to the type of purchase I am considering. So, let’s say I get the subscription and become addicted to TV. In that case it might be a very long-term decision. Not counting price increases, I will have spent $4,000 over 10 years, $12,000 over 30 years, or even $24,000 over the next 60 years (my life expectancy). That’s a lot of money, but for 10, 30, or 60 years of daily entertainment, it honestly doesn’t seem that bad.

The scary part

Here is where it gets interesting. What if I decided to take that $33 and invest it instead? Here are the results:

  8% 10% 12% 18% Actual $ spent
10 years $6,057 $6,788 $7,629 $11,015 $3,960
30 years $49,346 $74,907 $115,910 $469,241 $11,880
60 years $588,978 $1,560,865 $4,282,851 $100,278,668 $23,760

I don’t know how much you think you can earn in the market if you have invested over a long period of time. But let’s say I get 10% – the lower end of overall market returns over a long hold period. Looking at these numbers I realize those 30 years of TV watching has actually cost me $74,907, not $11,880. That works out to be about $208 per month! That is significant. Here is the equivalent monthly cost of all the numbers above:

  8% 10% 12% 18% Actual $ spent
10 years $50 $57 $64 $92 $33
30 years $137 $208 $322 $1,303 $33
60 years $818 $2,168 $5,948 $139,276 $33

Now you can decide

I honestly believe that some things are worth the cost. But there are other things that are definitely. Do I go through this whole process each time I decide to spend money? No, but if it is a commitment to repeatedly spend I try to do this. If nothing else, having done it several times makes me realize that a $20 or $30 per month decision is really much more than that. My hope is that this glimpse into my thought process will help you stop and think about your spending choices. Are they worth the true cost? Some will be, and some will not.

A Four-Year Old, a Light Saber, and an Invaluable Lesson in Personal Finance

Today is Porter’s 4th Birthday. For two years he’s asked me why I have to go to work. For two years I’ve told him the same thing:

To earn money, so we can buy food and have a place to live.

When he was really little he actually started to leave money out of the picture. I’d say I’m going to work and he’d respond, “to buy food?” And that, my friends, is how the world works. His first exposure to money and he just forgot about it. Food was the important part.

Last year for Christmas he was given a wallet with a five-dollar bill inside. I was amazed, but he actually kept that money in his wallet for the most part. A few times I found it among the toys in their toy box and I’d bring it to him and tell him how important it was that he keep track of his money (you can’t start ‘em too early). His aunt came and visited a few months ago and we headed off to Target because Porter had decided to assign those five dollars a job: buy a toy light saber.

Julie and I went off to do some other Target-errands while Porter and his aunt headed to the toy section. When it came time to checkout I was keenly aware of the entire process. This was his first transaction and I wanted it to hurt when he spent that five dollars. (The total was actually $7.50 and I made up the difference – a moment of weakness perhaps).

I made sure Porter handed the cashier the five dollars, and waited with baited breath to see his signs of hesitation, perhaps a furrowed brow and a longing look at his wilted piece of currency.

Nope. He handed it to her so fast and didn’t blink an eye. Money was a means to an end (end = light saber).

I used my new found knowledge a few weeks later when I came home from gathering food and was told that the basement apartment below us was now dealing with a broken window, compliments of Porter’s (awesome) ability to huck anything he can heft further than kids twice his age.

I didn’t so much care about the broken window, or even really about the money it would cost. I did want to teach Porter a lesson about what this loss would mean. I sat him down and told him that because it was going to cost money to replace the window, we wouldn’t be able to buy a Wii. His eyes got big and he got the lesson. The Mecham Pie is finite buddy, and you just ate a slice.

[We still haven't purchased a Wii even though I still really want one for, you know, Dad-Son bonding time and things like that. Porter still mentions the fact that we don't have a Wii because he broke the window. The lesson that just keeps on teaching!]

For Porter, the End was the Wii and we didn’t have the Means because he had broken a window.

As an adult with these little dependents running all around me, my Ends are different. Or at least they should be. And I suppose that is where the lesson lies.

This list is not exclusive, but as an adult, your Ends should include:

An Emergency Fund – Guys, give your wife a break and let her have a bit of breathing room! She’ll thank you for it.

Savings for Retirement – Don’t depend on anyone for your retirement except your own ingenuity, creativity, and sweat.

Minimal (or no) Debt Load – Pay off all of your debt as fast as you can and reclaim all of the time, sweat, thought, stress, and tears that create that precious income.

A kid gets bright-eyed with the prospect of spending $5 on a light saber. A guy gets bright-eyed with the prospect of spending $500 on a “modest” gas grill (the one that really caught my eye yesterday was over $900 though – yeah right!). Does the same guy get excited about throwing $500 toward unsecured debt? Or stashing $300 in his emergency fund?

At some point, the earlier the better, your Ends have to change. You’re no longer a kid. For Porter, Money equals things. For you, an adult, Money should equal Security and Peace.