Learn the Financial Impact of Your Everyday Purchases
The Big Purchases
Often when we become interested in personal finance and saving money we do something that is human nature — we focus on the big stuff like houses, cars, etc. It makes sense too – armed with careful research and smart negotiating tactics you can save large amounts of money on big-ticket purchases.
One of the ironies of personal finance is that all-too-often the money saved on those savvy big ticket purchases ends up being thrown away on a bunch of smaller purchases we usually never think about.
Those smaller purchases are what I like to call “everyday purchases.” Everyday purchases are those you make on a consistent basis — not necessarily daily but often enough that you can identify a pattern to them. Examples include lunch at work, coffee every morning, cigarettes if you smoke, that pizza you have every Friday night, a soda at break time, etc.
Take a second and jot down a few of the everyday purchases you make. Next to each item write down how often you buy it and what it costs each time you make the purchase. Average prices are fine. We’ll use this list a bit later.
Annualize Everyday Purchases
Now that we’ve identified what everyday purchases are, the real question is — what are they costing you? Really costing you? Do you know? Have you ever thought about it?
Here is how you can find out. A great way to gain some perspective on these purchases is to annualize them. Knowing what your everyday purchases cost on an annual basis it makes much it easier to compare them to your other spending.
Ready to give it a try? The numbers might surprise you!
Using the list you made a couple minutes ago, grab a calculator and figure out what your everyday purchases are REALLY costing you. Follow this example:
- Lunch out at work $8/day, 5 days a week = $2080
- Cigarettes $5/pack/day = $1825
- Morning Starbucks $5/day 5 times a week = $1300
- Friday Night Pizza $25/week = $1300
- Soda During Break $1/twice a day, 5 days a week = $520
- Cable TV $65/month = $780
I threw Cable TV into the list to show you that this trick works for any item or service you pay for on a regular basis.
Do some of these numbers surprise you? More importantly, do some of YOUR numbers surprise you?
Doing this exercise can help you identify where you can make some adjustments. Want to save $1000 a year? Eat out at work half the time instead of every day. Need to free up $600? Have pizza every two weeks instead of weekly. Caffeine buzz not worth $520 a year to you? Drink water during your breaks instead.
The point is the more you know about your spending habits the more control you have over your finances. These purchases are not necessarily bad. If you don’t want to make changes that is perfectly fine — at least you have some idea of where your money is going and if you are happy with your choices stick with them!
Now you have an easy way to figure out how small, regular purchases impact you financially. Based upon what you have learned, will you be making any changes to your everyday spending habits?
My husband and I have committed to paying the $22,000 tuition for private high school for our daughter – more than 10% of our gross income – and we are doing it by cutting down on the “little things.” We thought we had no extra money before but we are learning that we threw so much away without realizing it, and now we are able to save the money for tuition and won’t need to borrow money or go into savings. We live in the Washington, DC area (a high-cost area) and our other two kids go to parochial school with tuition – but we are able to do this and maintain a pretty nice standard of living. It can be done, you just have to set your mind to it and be motivated.
There are really only two ways to make a big dent in your annual expenses – reduce the cost of your largest expenses, and reduce your frequent or recurring expenses. Those are the two types of expenses that contribute to the bottom line.
If your expenses aren’t large or frequent, then it’s only “noise” with respect to annual costs.
Think of taxes – they’re big and they’re recurring. It isn’t unusual to have people paying a million or more dollars over their career in taxes. That’s why it’s so important to dodge these type of large and recurring expenses.
I applaud Brian’s efforts to save money! Even more so, I applaud his efforts to help people be conscious of the aggregate annualized impact of their spending. However, he is very much over-estimating the savings factors for some elements because he is not including replacement cost.
For example, Brian identifies the annual cost of eating out at work as $2080 and then asserts that you could save around $1000 by only eating out half as much. Unfortunately, that is only true IF YOU DON’T EAT AT ALL half the time. However, most people (including Brian, I think) would pack a lunch instead of eating out. In this case, the true cost savings is the $8 minus the cost of the lunch, not the entire $8. In reality, it is hard to prepare a good lunch for under $5 (remember to add in the cost of cooking it, any waste, and the cost of gas to the store to buy the food – I’m not even going to consider the cost of your time to make it). So in reality, you are probably looking at more like $8-$5 = $3/day cost savings ($15/week – $780/year.) Sill significant, but not $2000. Another option would be to just eat out at a cheaper place. For example, the McDonalds next door sells 2 McDoubles and a Med Fry for $3.78. That’s hard to beat, finance wise, even from home (although you could be eating more healthy/expensively).
The same faulty reasoning applies to Brian’s numbers for Pizza. However, his number for sodas is fine because it takes into account the free (employer provided) substitute of water.
Thank you for the comments so far!
@MP — Those little purchases really do add up over time don’t they? If I had a dime for every dime I wasted… LOL
@Clair — It always amazes me how some people have a handle on one type of expense or the other, but often not both. I suppose that is the trick isn’t it — to be able to control both the frequent AND large expenses?
@Average Joe — Guilty as charged — I also didn’t take into account vacations, sick days, etc! I was trying to keep the math rather simple so as not to take away from the larger point that those small, recurring expenses we often don’t give much thought to really can and do add up over time. Any savings at all, whether $1000, $780 or whatever number you want to come up with, could be potentially significant to someone with financial difficulties.
Writing down all your expenses and keeping check of all your expenses is very important as you noted. The other side of saving money is trying to find ways of making more money. It you have cut your expenses to the bone and changes your habits, you must look at increasing your income as well. Then you will be able to beat debt from both sides.
@Debt Counselling — Thank you for the comment — that is a super topic for a future guest post!
All good points but isn’t this the type of thing we’ve all heard over & over again?
I would think most people who read this blog are aware of the “latte effect.” If you think about any expense x1,000 it’s going to be a lot.
I’m glad though Brian didn’t start going off about how if you put the money you saved in an index fund and it made “just” 8% annually etc etc…you’d have a billion extra $s
Brian, you make a good point, I just think it’s an unoriginal played-out one. Please take as constructive crticisism.
@Howard — Thank you for taking the time to leave your comment!
I’m still working on my first billion, so I left that part out until I can write about it from experience…
To get really crazy with the numbers, you could take the annualized dollars and extrapolate them out for the remaining years of your life expectancy . . . just for fun, ya’ know . . .
@sekishin — LOL! Thank you for the comment!
Average Joe- I disagree with your statement that “In reality, it is hard to prepare a good lunch for under $5”. What meals are you cooking at home that are worth $5 in ingredients as a leftover meal the next day???
I made an $8 pot roast the other night with $5 in potatoes, carrots, and onions that fed two and yielded 3 leftover portions for lunches. I also make sandwiches and fruit salad for work- the lunch meat and 2 pieces of bread definitely don’t cost me $5 a day.
Granted, I’m not tracking the cost of my time cooking at home, because that time is PRICELESS! Cooking at home is worth your time and effort; I can’t think of anything more crucial to my budget.
@FruGal — Thank you for your comment! I think everyone has their own level of frugality they are comfortable with.
Just about every day for lunch I eat a ham sandwich that I estimate costs less than a dollar to make including ingredients, time, gas to store, auto wear and tear, auto insurance, electricity to light the kitchen (on dark days only) and cool the ham, cost of trash removal, prorated square footage value of the space in the pantry to store the bread, and any other possible variables I’m missing. Whatever the “real” cost of that sandwich, I’ll continue to eat it every day because it is what I enjoy and I KNOW it costs less than eating out. To many I might seem like a cheapskate — but to me that ham sandwich is priceless!
this reminds me, I need to cancel my gym membership that I never use!
@ratenerd — Nice! That is exactly what I was talking about. Hope you can put that wasted money to much better use. Thank you for reading and leaving your comment!
Interesting! Your comment made me wonder if my cost numbers were too high. Also, a little background here may help with regard to understanding my food requirements – I’m 6’4″ and I work out 4 times a week. Consequently, I may be at the high end.
However, I did a search for the average cost of bringing a lunch from home and was able to find some information in the educational context. The sites below put the average cost of a lunch from home at about $3.50.
I figure that it is going to be hard to beat a school’s cost because they have so much volume and often use cheap bulk materials. Reviewing the calculation that I made before with regard to cost savings for lunch, using the average school figure vs. $8/day eating out results in a yearly savings of $1170/year – still not real close to $2000. Also, if you do the comparison between the $3.50 average cost and the cost that I pay for McDonalds next door ($3.78), you end up with a yearly savings of 0.28 * 5 * 52 = $72.80. No where close to 2K.
Also, here’s a great calculator resource with regard to finding the savings when bringing your lunch from home.
Also, please note that the cost of food varies widely from one geographic area to another. I went to undergrad at a place where a gallon of milk could often be found for around $1.50 and a year later lived in another city in America where a gallon of milk was $5.
Please don’t get me wrong, I applaud the efforts that you and Brian are making to save money and live frugally and I really think that everyone could learn something. However, instead of being persuasive, presenting the facts and accounting in a slanted rather than an accurate way hurts your credibility and can really lead to resentment if someone follows your advice and fails to achieve the savings that you say they will. Maybe it’s my midwestern honesty, but I would rather see numbers that are as accurate as possible, rather than numbers that are slanted in a way to encourage me to do one thing or another – even if it is “for my own good.”
@Average Joe — I appreciate the time and research you did in order to leave this comment and the previous one.
The whole point of this article is to show people how they can identify some areas of excessive spending they may not have thought about before. It is meant to be interactive and I ask people to make their own calculations and conclusions.
I THINK you are mistaking the examples I use as being something more than what they are. The examples exist to illustrate the exercise, not to serve as some sort of guarantee of savings.
Have you done the exercise? Did you identify any areas where you can save some money? If so, congratulations!
The link above is to an Investopeida article (via Yahoo) that compares the cost of items on the dollar menu at some major fast food chains with average retail cost of the food itself. I just wanted to bring your attention to the second item on their list because it was one that I mentioned in my earlier comments.
No.2 McDonald’s: Budgets Are Lovin’ It
The iconic Mcdonald’s dollar menu has been around since 2002, and although it offers only a handful of items, they seem like a steal. A dollar-menu staple, something you could actually call “lunch”, is the McDouble: two hamburger patties, one slice of cheese, condiments and a bun.
Per-Burger Cost at McDonalds: $1
Per-Burger Cost at Home:
-Meat: 49 cents
-Cheese: 20 cents
-Bun: 25 cents
-Total: 94 cents + condiments and the time it takes to cook it
Bottom Line: Assuming the cost of the condiments adds a few more cents, you can see that the McDouble is a tantalizingly good value.
Joe again: Consequently, even 1) ignoring the cost of condiments, 2) ignoring the cost of the gas to cook it, 3) ignoring the cost of the gas to go and get it from the store, 4) ignoring the cost of refrigerating and packaging it, and 5) treating your time as having zero value, then you are saving all of 6 cents by making the burger at home.
Consequently, if you are eating out on dollar menu items, you are probably eating out about as cheaply as you can cook from home. Thus, instead of putting a whole lot of time and effort into cooking from home for not a lot of payoff, you will get a lot further dropping your cable or doing some of the other things that Brian suggests. Also, don’t feel bad if you don’t want to waste your time and effort cooking at home – just eat from the dollar menu and you will save the same money.