Guest Post: Real Cost of Money

Part of household management is financial management. We work together on our finances in our house and work to be in agreement on our budget and plan, but my husband handles the bulk of the financial management since finances are his passion. He was kind enough to share some of his passion with us in the following post.

Real Cost of Money

The vast majority of Americans save the minimum percentage recommended for retirement or less of their income for retirement.  The rest is spent on “stuff”.  Stuff may refer to: a house (or two), a $30,000 car, electronic gadgets (+expensive contract in the case of Verizon/AT&T), a boat, or other things to fill a basement.  

It is easy to justify spending the vast majority of our income, because, we already saved for retirement (up to 15%).  This is based on the premise that we are going to work until we are 65 years old.  Rather than asking, do I have the money for this, a better question is: how much more do I have to work if I purchase this item.  I like to think of money in terms of time commitment rather.

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Most people have a fixed income due their job.  I, for example, can not work more at work to get more money because I am salaried.  As a result, if I chose to purchase something, I sacrifice the opportunity to invest that money.  Let’s say I was in the car market deciding whether to purchase a car.  If I spent $30,000 on a car, which depreciated quickly, I would be foregoing the opportunity to invest the money.  By investing the $30,000 in the stock market, assuming the investment beat inflation by 6%, that would be $172,304 in 30 years (in today’s dollars), allowing the typical person to retire several years earlier.  The real question is: would you work an additional 2-5 years to buy a new car? Very few people would answer yes, but most people in that situation buy the new car.  Alternatively, one can drive a used car for virtually nothing.  For example, 5 years ago I bought a 1997 Subaru Legacy in excellent condition with 90,000 miles on it for $2500.  Over the last five years, the car has depreciated ~$500 and I expect to drive it for another 10 years.  As a result of carefully shopping for a value used car, I have had minimal car maintenance, much of which I have done myself.  In total, I have spent ~$10 per month on my car between depreciation and maintenance.  More importantly, it is one huge step towards earlier financial independence (retirement).

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Using this example, we determined spending $30,000 today costs $172,000 at retirement. For the average american (average personal income is $44,500), spending $7,700 on something which depreciates will require an individual to work an additional year before retirement.  Or spending $640 will require someone to work an additional month before retirement.  Using this logic, the next time you buy an iPhone, ask yourself if you would work a whole month to buy that?  Say NO to stuff.  Stuff enslaves people and prevents them from pursuing their passions.  Say yes to relationships with people and a relationship with God, which provides purpose in life.  Say no to the lie of the world, that stuff makes you happy.  The reality is that it enslaves people.  

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