Quickly Estimate the True Cost of Ongoing Spending

by Michael on Oct 21, 2013 · 7 comments

Photo of an Empty Wallet

Today I want to share a rule of thumb to help you quickly estimate the long-term impact of your ongoing spending decisions.

If you’re having trouble keeping your spending in check, this tip will hopefully motivate you to plug some of the holes in your budget. And it may help keep the rest of you out of trouble.

In short, to estimate the true cost of an ongoing indulgence, simply multiply the monthly expense by 200. Or, for the math challenged, you can simply double the amount in question and tack on a couple of zeroes.

Seems too easy, right? Well, it’s not. 200x the monthly cost of your habit is (roughly) the future value of that monthly expenditure ten years down the road. I’ll explain more below. But first, some examples.

The high cost of habits

Consider your morning coffee. Yes, the latte factor. Again. It may be trite, but it’s useful for illustrating the point.

Let’s say that you spend $3 on a high-end coffee on the way to work each day. With 20 work days in a typical month (and taking weekends off), you’re looking at $60 per month. Not so bad, right?

Well… After multiplying by 200, you’ll discover that you’re foregoing $12k in wealth over the next decade in order to get your caffeine fix.

Irony alert: I’m sitting in a local coffee shop drinking a latte as I write this. This is an occasional indulgence that’s well worth it in my book. But it’s nowhere near a daily occurrence. I usually brew my own with an Aeropress at home.

What about cable TV? That $100/month package will set you back a whopping $20k over the next ten years. That’s not quite the deal you thought you were getting when you signed the contract, is it?

This isn’t to say that you shouldn’t enjoy things in life. As noted above, I enjoy an occasional latte, and we do have satellite TV service. But these have been conscious decisions as opposed to mindless indulgences.

The point here is to encourage you to stop and think — ever so briefly — about the impact of your spending decisions before you reach for your wallet.

Where does 200x come from?

To arrive at the 200x value, I simply computed what $X/month over the next ten years would be worth if you had invested the money instead of spending it.

Investment returns were pegged at 7%/year, which is somewhat below the historical average for a standard 60/40 portfolio. Seems like a reasonable assumption.

Of course, thanks to our friend inflation, a dollar ten years from now will be worth less than a dollar today. Thus, I also accounted for inflation.

To do this, I pegged inflation at 3%/year (near the historical average) and did two things. First, I ratcheted up the spending 3% per year to account for the increased cost of your habit over time. Second, I docked the investment return by 3%/year to arrive at a real return of 4%/year.

And at the end of all this, I learned that a dollar in monthly spending has a ten year value of roughly $200. So please, the next time you’re thinking about taking on a new expense, think about the long-term effect…

Would you rather incrementally ratchet up your standard of living or ratchet up your savings and have thousands (and thousands!) of extra dollars down the road?

1 Little House October 21, 2013 at 9:46 am

This is why I’ve changed some of my spending habits over the past year; I now make my coffee at home, we’ve ditched cable, and found a cell phone plan that’s almost $100 less per month than our old one. I’d rather have that money for paying off debt then investing!

2 Michael October 21, 2013 at 11:30 am

Your future self will thank you for making these decisions. 🙂

3 Tie the Money Knot October 22, 2013 at 12:49 am

I like it! I think like this as well, at least some of the time anyway. When put into perspective like this, it can give a person reason to pause and think before making such purchases. Small amounts today can add up to a lot of money down the line.

4 Edward Antrobus October 22, 2013 at 8:27 am

On the flip side, I’m on track to have a fully funded retirement when I am ready to retire. Why forgo a pleasure now to have more money than I need in the future?

5 Michael October 22, 2013 at 9:35 am

Edward: I agree completely. As stated above, the point here is just to get you to think about the impact of your spending decisions.

In other words, this is more about combatting mindless spending than it is about enforcing arbitrary austerity.

6 Money Beagle October 22, 2013 at 10:29 am

It’s funny because I am a long-term thinker when it comes to money, and my wife often gets crazy when I offer the opinion that ‘no, we can’t afford it’ on various things that I know would only have short-term impact and that I feel we can do without. However, the payoff comes when we are looking at a bigger goal and find that we can easily afford it, pay cash, and not have to worry about it.

7 thepotatohead October 29, 2013 at 10:10 pm

I’ve been trying to cut down on my recurring bills as much as possible for this reason. I came to the realization that If I can get rid of some of the pointless bills each month that in the next 10,15,20 yrs I’d have a boatload more money. Easy concept but definitely takes some self motivation and willpower to implement.

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