“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.
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|
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|
Now you can decide
I honestly believe that some things are worth the cost. But there are other things that are definitely not. 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.