# It’ll Cost You – HumbleDollar

Does what we spend, even seemingly modest amounts, have an impact on long term financial goals? You betcha it does. I have often criticized the \$4.00 coffee and \$200 tattoo spending and more, but I never attempted to quantify the possible impact. Here is someone who has done the math.

It’ll Cost You Sanjib Saha  |  October 15, 2019

IT’S IRONIC that we often shortchange retirement savings during the first half of our working lives, because that’s when we can buy future retirement dollars at a huge discount—thanks to investment compounding. How can we hammer home this point?

My proposal: We should adopt a simple mental math rule that allows us to weigh today’s spending against future retirement dollars. That brings me to my ”6 to 2 times 200” rule. The rule covers five age groups: early 20s, late 20s, early 30s, late 30s and early 40s.

The first part of the rule—the “6 to 2” part—gives the compounding factor for each age group. For instance, the compounding factor is six times if you’re in your early 20s, five times if you’re in your late 20s, and so on. As you grow older and enter the next age group, the compounding factor drops by one. What does all this mean? Each \$1 spent by folks in their early 20s means at least \$6 less in retirement spending. Similarly, \$1 spent in your early 40s means at least \$2 less in retirement.

Admittedly, the rule is only an approximation. Still, with any luck, it’ll help us to pause before spending. For instance, it will make a 27-year-old realize that switching to that shiny new \$1,000 iPhone could cost as much as \$5,000 in retirement spending. Is it worth effectively spending \$5,000 on a new phone?

Our 27-year-old may still decide to switch to the new iPhone. After all, we all make bad spending decisions and we usually get away with it, provided the bad decisions aren’t too frequent or too costly. Instead, the real damage often comes from recurring expenses—the monthly magazine that no one reads, the extra property taxes for the bigger-than-needed house and countless similar items.

## One comment

1. Dwayne Gartner says:

I have a related tool for determining whether or not I should buy something. First, I decide if something is a need or want. When it is a want, I estimate how much use it will get. Let’s say I want to buy a \$450 canoe and I might get out to use it one day a month in the summer or 3x a summer (because I don’t live on the water). Let’s say that I make \$20 / hr. My purchasing power after taxes and other deductions may be actually \$15 / hr. The question is will that canoe be worth 30 hrs of my life working for 6 to 12 hours on the water for one summer? A canoe will last forever so maybe once I have it, I will use it more. Then again it might just sit in the yard. Some things, I can look at and say no way and others like the canoe is a crapshoot.

I saved a lot of money doing my own repairs and renovations. I have bought speciality tools knowing that one day I may use them again and in many cases I have. Now, in retirement, I have decided in more cases that I will not live long enough to use a tool again. I am starting to apply this rule to my projects too. Will the cost of the expenditure be worth my retirement dollars that I could be doing something else.

For the record, I have had a canoe for over 40 years. Yes it was worth it when I was young and later when my son came along. But the canoe has only seen the water once in 15 years. I am hoping that the grandkids will enjoy it next.

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