Most of us think of spending money in the least painful terms. I suppose that’s only natural. If we could see clearly how a simple purchase fits into the big financial picture, perhaps spending money on little stuff wouldn’t be quite so easy.
In his book “Pour Your Heart Into It,” Starbucks coffee founder Howard Schultz says the average Starbucks customer spends $3.50 per visit and makes 18 visits per month.
I’m fairly certain that most of these customers think of that as a series of $3.50 expenditures because it’s less painful than seeing it as a $756 annual expense, spent $3.50 at a time.
Now, I am not suggesting the Starbucks is a habit that must be banished from your life. Not at all. What I’m saying is that if you’re going to spend it, stop trivializing it as an expense so small it doesn’t really matter.
“It’s only pennies,” might be the way you think about it. But it’s not pennies. It’s dollars—756 of them out of the money you have left once you pay all of your bills and expenses.
If you can get into the habit of quickly calculating the annualized cost of things, you’ll have achieved an effective way to get mindless spending under control. Using this quick way to estimate the true cost of an expense as it impacts your annual income is a great tool to take control of your mind and your bank account.
Oh, but you think you’re terrible with math? Numbers give you a rash? Join the club, and then understand that is no excuse. You can train your brain to take control of your spending. Let me show you.
Here’s the rule: Take a monthly figure, and then add a zero plus a little. Say you spend $5 a week at the vending machine at work. That $5 weekly expense is about $20 a month ($5 x 4 = $20).
Now add a zero to $20 ($200), plus a little (oh, let’s say $50), which is about $250 a year. Let’s check the numbers: $5 x 52 = $260. Very close! Do you get it? Adding a zero to a monthly expense gives you a rough 10-month equivalent, and adding a little accounts for the other two months in a year.
Here’s another example. Jenny gets her nails done every two weeks at a cost of $25 per visit. That’s about $50 a month. Times 10, that’s $500, plus a little ($75) is $575. Again, let’s check the numbers: $25 x 26 = $650. Not far off, and quite shocking when all along Jenny has been trivializing this as just a little something she does for herself. Now, don’t get me wrong. I’m not against nail appointments. I just want you and Jenny to know the true cost of what you believe are insignificant expenditures.
Most people think of their income in loose, inflated terms because that’s the least painful approach. Take Tom and Susan. They live in the false security of a $70,000 annual income, as in, “We make $70,000 a year, so we should be able to buy what we want without feeling guilty.”
The truth is Tom makes $68,703 a year, which is close, but not exactly $70,000.
Allowing for taxes and other payroll deductions, his net take-home pay is something closer to $55,000.
Of that amount, their actual discretionary income (what they have to spend after allowing for the essentials of food, shelter, insurance, transportation, etc.) is more like $6,000 annually—hardly the fictional $70,000 on which they base their lifestyle.
With just a little practice, Tom and Sue can get real about their income by thinking in more realistic terms. While they might make close to $70,000 a year, they have just $500 cash to spend each month. That makes blowing $100 here or $3.50 there more significant.
Start annualizing your spending and thinking of your income in more realistic terms. It’s painful at first, but once you get past the shock, it will keep you awake with your financial feet planted in reality.
Even better, money will stop dribbling out of your life.
Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog and the author of the book “Debt-Proof Living.” Mary invites you to visit her at her website, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at EverydayCheapskate.com/contact, “Ask Mary.” Tips can be submitted at Tips.EverydayCheapskate.com. This column will answer questions of general interest, but letters cannot be answered individually. Copyright 2021 Creators.com
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