Great Savings 10: Spending Consciously


Our great savings tip series continues.Today’s Great Savings Tip is about gaining long-term perspective as we go to spend money. When we focus only on the little things, it’s hard to see how pumping a few dollars in a vending machine or buying a latte every morning impacts our overall wealth. Of more immediate concern is usually how much we’ll enjoy the experience of the moment. Unfortunately, as the months roll by and we stare at an ever declining bank balance it seems clear those little things count.


Few people get wealthy or save enough money for college or retirement by winning the lottery or writing a best seller. They accumulate money by spending less of it over a long period of time, and then they make smart investments. In other words, they make conscious and deliberate choices when it comes to buying.



For a lot of us, spending too much money is easy. Why? We simply don’t take time to consider how buying right now impacts our ability to buy later on. Instead, we see something we want and automatically reach for our wallets to pay for it without considering how it fits into achieving longer-term goals. Today’s tip is therefore about learning how to take a longer view as we go to spend our hard-earned cash. We call this tip the annualizing trick, but trick or not, it’s a great method for saving money and building wealth.


The annualizing trick is easy. How does it work? When you’re ready to make a purchase stop and ask the following questions:


(1) How many payments per year?

(2) What’s the total cost per year?

(3) Is the total cost really worth it to me?


I'm ready for a latte. Anyone else?

Is that drive up coffee habit really worth it?

Let’s look at an example to see how this plays out: Suppose you drive past a coffee stand and see a sign advertising iced coffee for $2.49. Your throat is parched. It sounds refreshing. A couple of dollars for a refreshing beverage sounds reasonable, right? Not so fast. Before you pull into the drive-through, ask the following question: “How many iced coffees do I buy in a year?”


On reflection, you decide that most weeks you end up buying 6 coffees. How many is that in a year? We know there are 52 weeks in a year, so we multiply 6 x 52. To keep the math simple you can round the numbers and use 50 instead of 52. Thus, 6 x 50 = 300. In other words, you end up buying about 300 iced coffees per year.


In step 2, it’s time to ask what a coffee habit like this one costs per year. To do this multiply 300 coffees per year times the price you pay for a single cup. Again, to keep it simple, it’s easier to round costs to the nearest quarter dollar. In this case, $2.49 rounds to $2.50 so use that figure and multiple it by 300 ($2.50 x 300 = $750). Wow, your total cost for an iced coffee habit is almost $750 per year!


Step 3 is to decide whether the total cost is worth it to you. This isn’t always as clear cut as it might seem on the surface. For some, a daily coffee habit might be a way to relax and enjoy the day. It’s hard to put a price on that. Others might decide to cut back rather than cut out coffee altogether. For example, if they drink only 3 iced coffees per week they could reduce the yearly total to $375. That might be enough to create decent savings and still get some enjoyment. Yet for some, knowing their coffee habit is taking such a huge bite out of their annual budget could be the motivation they need to start a new “all water” habit.


Ultimately, the annualizing trick is about making better choices, meaning it’s about having the information you need to decide what’s most important to you. Is drinking that daily cup of coffee an important lifestyle choice for you, or is it little more than an unconscious drain on your financial resources? You decide.


Annualized Costs: Living Well On Less


What does cable TV end up costing you each year? How about rent, clothing, car payments or gasoline? In the same way we calculated the real cost of an ice coffee we can look at anything we purchase on a regular basis. See the chart below for a few examples.


Annualizing to discover real cost.

When talking about accumulating wealth, annual costs can be multiplied by 10, 20, 30 or 40 years to discover the potential savings over a lifetime.


Did it surprise you to learn an $80 monthly cable bill amounts to $960 per year? You can rent or download shows and movies for a fraction of the cost. Had you considered your annual cost as you go to pay rent? At $840 a month, an annualized rent adds up to $10,080. Ouch! Maybe it’s time to look for a decent place at half the cost. (If you’d like ideas for cutting rent, see: “7 Tips To Find Nice Affordable Apartments”)


Even occasional purchases for some items like clothing may be worth looking at on an annualized basis. Remember, a purchase isn’t occasional if you end up buying several similar items over the course of a year. If you buy one here and a few there it all adds up.


This car is just ducky.

That new convertible sure looks nice, but is is really worth the payments?

What about car payments? In the example above, a $350 monthly car payment costs $4,200 per year. At that rate, it’s important to know how much your car depreciates each year. You can check it out at a website like Kelley Blue Book. Since some new cars lose value at a rate faster than payments build equity a used car might be a better choice. Again, you’ll need to decide what’s important.


Even The Little Things Add Up


The prices at the pump are exhorbitant.

Better recheck that price at the pump. Even a few cents difference adds up.

Gas prices go up and down all the time, but gas purchases still take a huge chunk out of most budgets. This begs the question: Is it worth saving a few cents at each fill up? Say you fill your car about 2.5 times per week, that’s about 130 fills per year (52 weeks x 2.5 fills per week). In the chart above, a $1 increase in the cost of gasoline costs $1540 per year. That means a 10 cent savings for every fill up still amounts to ($1540/10 or) $154. Wow! Armed with this knowledge you might decide it’s worth doing everything possible to find the cheapest gas around and cut driving to a minimum. For more gas savings ideas see our post 27 Tips For Saving Gas.


Rethinking The Road To Riches


Ultimately, every decision to spend is a matter of choice. Yet by annualizing costs, it’s far easier to see the impact certain spending has on your bank balance, and thus, your ability to build wealth over time. The results are often shocking. The savings you can achieve make it well worth the effort to learn and use the annualizing trick.


Action Item:


Identity 3 ways you spend money regularly. Now, annualize the cost and decide whether it’s worth making changes. Now, here’s the real challenge: Don’t just cut spending, but try putting the money you cut into a savings account. Do that and you’re on the road to a brighter, more prosperous future.

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