How Much Does that Cost?

Wealthy people don’t typically become wealthy through a single good investment.  The plan to be wealthy.  Then, they execute the plan.  The mathematics really are very simple – it is the committment that is difficult.

One of the biggest challenges in becoming wealthy is finding money to invest.  Growing wealthy requires putting money away regularly.  It doesn’t need to be a whole lot of money, but it needs to be consistent.

The trouble is that most people increase their spending until their income equals their outgo each month.  Actually it is worse than that, because most people will run up credit until their payments equal their income each month.  This means that if anything happens at all, they could see the creditors calling.

Today I thought I would list some of the typical expenses people have, what it costs over the course of a year, and then what it costs over a lifetime.  Please see the table below.

Item Cost Yearly Cost Investment Loss (45 years, 12% return)
Daily Latte $5/weekday $1,300.00 $1,980,000.00
Vending Machine Candy Bar $0.75/weekday $195.00 $297,000.00
Car Payment (5% APR) $500/month 6012.5 $9,150,000.00
Home Payment (5% APR) $1200/month $15,066.67 $22,900,000.00
Cell Phone $100/month $1,200.00 $1,830,000.00
Lunch Out $7/weekday $1,820.00 $2,770,000.00
Dinners out (4 per week) $200/week $10,400.00 $15,800,000.00
Lottery Tickets $2/week $104.00 $158,000.00

I’ve included small things, like a candy bar from the vending machine, and large things, like a house.

The final column gives the investment loss.  This is how much money you would have at retirement (45 years later), assuming that you invested the money each year instead of making the payment/regular purchase and received a 12% return on your investments.  Note that this is close to the historical return of the stock market, so the numbers are fairly representative.

First of all, notice that a $1200 monthly house payment (which is about a 30-year loan at 5% on a$225,000 house) will cost you almost $23M in cash at retirement.  Maybe Mom and Dad’s basement is the place to stay!  Or maybe at least it is worth getting less house, paying it off with a 15 year loan, and then resisting the urge to add home equity loans and withdraw the equity again.

Even “little” things like that daily latte cost a lot.  Skip it and get coffee from the office coffee maker and you’ll have almost $2M extra in your pocket at retirement.  Withdraw 8% from that each year, which you should be able to do without the principle ever decreasing if invested in stocks,  and you ‘ll have a monthly income of over $13,000. That is about ten times the average Social Security payment that people receive.  Given that it is very unlikely that Social Security will be around in another 15 years, it might be a good idea to skip that stop at Sixbucks each morning.

Even that $2 lottery ticket you buy each week will cost you about $160,000 at retirement.  That would be enough to replace the Social Security benefits of a moderate income worker!  A daily candy bar from the vending machine will cost over $300,000 at retirement.

The point here is not to go without everything.  The point is that if you can cut back on a few things, you can set yourself up to have a much better life later on.  Just as having a side of fries or a soda at every meal can result in weighing fifty pounds more, buying a few extra things every day can also greatly affect your financial life.  Simple things like only having a latte once in a while, or not having the cell phone plan with all the bells and whistles, or delaying getting a house by a few years can make all the difference.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Photo credit:  Nick Benjaminsz, downloaded from stock.xchng.

3 thoughts on “How Much Does that Cost?

  1. The other point here, is to take things into perspective. Your latte, coasts you 1$104 per year. Your 4 X Per week restaurant bill coast you $10,400!!!

    If you cut down to once per week, you make a HUGE impact. Denying yourself the latte, neehh…

    These #’s may be hypothetical, but they do illustrate the point “don’t sweat the small stuff”, but pay attention go the big stuff!!!

    Great post!

    • Good point. It is definitely better if you can cut back on the big stuff, or as we say in engineering, determine the biggest effects and start there.

      The other point though, going back to my dieting example, is that you can certainly weigh a lot less if you swear off all bread, but most people can’t live that way. If instead, you cut back your sodas from one at every meal to one per week, you would lose a good amount of weight as well, but with less sacrifice.

      Some people will cut eating out back to once a week or so, and they will be the ones with $20M in the bank at retirement. Even those who only cut back to one latte per week, however, will also be well off at retirement, although they’ll only have $2M, say.

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