Author Topic: Saving versus spending ONE DOLLAR  (Read 4060 times)

purple monkey

  • Bristles
  • ***
  • Posts: 323
Saving versus spending ONE DOLLAR
« on: October 17, 2015, 09:20:48 AM »
OKay,
I have a question, oh wise ones.
How can I understand and have others in my family understand the opportunity cost of just spending ONE DOLLAR unnecessarily?
Others often say, "It is just ONE DOLLAR, don't worry."
So, is it 4 cents that I am saving into the future, is it 25 cents a year and doubled in 4 years?
Help me to explain how each dollar counts towards FIRE.
TIA

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6742
Re: Saving versus spending ONE DOLLAR
« Reply #1 on: October 17, 2015, 09:32:22 AM »
Save $1 for 30yrs at 7% after inflation leaves you with ~$8.

I prefer to use the save $25 and invest it gives you $1 per year for life when explaining why saving small amounts is a good thing. This statement isn't 100% true, but until your family and friends learn more about the subject it's good enough. When they are ready to delve into the Trinity Study and cFIREsim you can discuss the subject with greater nuance.

Everyone can manage to save $25.
« Last Edit: October 17, 2015, 09:37:59 AM by Vikb »

Rezdent

  • Pencil Stache
  • ****
  • Posts: 813
  • Location: Central Texas
Re: Saving versus spending ONE DOLLAR
« Reply #2 on: October 17, 2015, 09:35:28 AM »
I think this would kinda depend on the audience, but a dollar saved is worth more than a dollar earned.

There are costs incurred on earning that dollar.  Add them up.
When adding up costs, don't forget to include transportation to and from work, clothes or items you wear just because you work, etc., taxes you pay on that dollar.

Example:  You find that you only get to keep around 60 cents of an earned dollar, so you'll need to earn  1.40 at a job to replace the one you just spent.

Or you could not spend the dollar, and put it to work earning little fractions of more dollars.  Do this enough times, and you won't need to earn dollars any more.

Murse

  • Pencil Stache
  • ****
  • Posts: 540
Re: Saving versus spending ONE DOLLAR
« Reply #3 on: October 17, 2015, 09:37:08 AM »
My experience is other people just don't and won't understand until they are willing to. If you try telling someone they can't buy their daily Starbucks because of the opportunity cost, they instantly begin to justify it in their head by telling themselves "so and so makes less then me and they buy coffee," or "I make 20$/hr, I am really only trading 15 minutes for Starbucks." My girlfriend and I were talking about finances and clothes (her weakness) she justifies it by saying that expensive clothes increases career opportunities, increasing her earning potential, which makes it an investment. When I try saying sure but you don't need to buy 3 new outfits every month, 8-10 total outfits is more then enough she tunes me out. People will always justify what they buy.

DaveR

  • Stubble
  • **
  • Posts: 243
Re: Saving versus spending ONE DOLLAR
« Reply #4 on: October 17, 2015, 10:07:38 AM »
So, is it 4 cents that I am saving into the future, is it 25 cents a year and doubled in 4 years?

One dollar saved and invested is 4 cents a year, for life. And that 4 cents is real (inflation adjusted).

I try to explain some version of these examples:

On your child's first birthday, you invest $10 for them. On their 18th birthday, that $10 investment has grown and starts to pay $1 each birthday. For life.

I save and invest $1 today. I'll start getting $0.04 a year (real) so my dollar will be paid back to me over the next 15years. I plan on living longer than that... 23yr? that pays $2 (nominal), 28yr? you get $3. 50 more years of life? $15. How long to you think you'll live?

purple monkey

  • Bristles
  • ***
  • Posts: 323
Re: Saving versus spending ONE DOLLAR
« Reply #5 on: October 17, 2015, 10:59:34 AM »
So, is it 4 cents that I am saving into the future, is it 25 cents a year and doubled in 4 years?

 How long to you think you'll live?

I hope to live about 25 more years, but not sure, as have many health problems not related to lifestyle.

Hope that helps.

stlbrah

  • Bristles
  • ***
  • Posts: 430
Re: Saving versus spending ONE DOLLAR
« Reply #6 on: October 17, 2015, 11:15:39 AM »
That's just not a good mindset imo.

It's just one dollar.
It's just one fast food meal.
It's just one prostitute.
It's just one line of coke.

Just trying to make a point, lol.

intellectsucks

  • Stubble
  • **
  • Posts: 228
Re: Saving versus spending ONE DOLLAR
« Reply #7 on: October 17, 2015, 12:19:45 PM »
Your question is vague but here is my attempt to answer it.  There is more than one way to value a dollar, all of which complement each other when that dollar is saved vs spent.

The first value for your dollar, is the amount that it can grow to over time.  In ten years that dollar has grown to $1.34 (at 3% interest rate), $1.81 at 20 years, $2.43 at 30 years and $3.26 at 40 years.  The numbers go even higher if you choose investments that will grow at an annualized rate greater than 3%.  So each dollar you save will be making you richer in the future.

The second value is the how much time, or life energy you have traded for that dollar.  By saving that dollar your are essentially keeping that life energy.  An example may help with this.  Though my annual salary is over $50k (a gross hourly pay of around $25/hr), my actual take home pay, after taxes, insurance, transportation and other job related costs is around $6/hr.  This means that every dollar takes me 10 minutes to earn.  Those are ten minutes that I will never get back and come from a limited pool of minutes that I have in my lifetime.  By not spending that dollar, I now have ten minutes in the future that I will not need to work.  Even more minutes if you are counting how much that dollar will grow in the future.

The third value of that dollar is a need that has been eliminated, thereby reducing the amount of income you need.  For example, if I buy a cup of coffee for a dollar every day on my way to work, I now need $252 additional dollars in take home pay/year.  This translates to roughly one more 40 hour work week per year FOR THE REST OF MY LIFE.  By no spending that dollar on coffee, I have now eliminated the need for one week of work, every year until I die.  This also reduces the total amount that you will need to save in order for your savings to provide an income sufficient to pay for all of your expenses, eliminating the need to work.  If your expenses are $40,000/year then you need to save roughly $1 million.  If your expenses are only $15,000/year, then you only need to save $375,000.

So by saving ONE DOLLAR, you are 1. Increasing the amount you have saved both now and in the future 2. Freeing up a certain amount of time in your life that will not need to be spent working 3. Reducing the amount that your savings will need to generate to eliminate the need to work altogether.

I am currently trying to adjust my mindset in a couple of ways to help me save vs spend.  Maybe you will find them useful as well.  First, I ask “Is this expense worth the time that I will have to spend at work instead of doing X?” In my case this is spending time with my daughter, and most small purchases simply aren’t worth taking time away from my daughter.  Next I ask, “What is the REAL, ACTUAL need that I am spending this money to address and is there a less expensive way to address that need?”  This morning I woke up late and forgot to brew coffee.  Instead of buying it at the local convenience store (where I would almost certainly have spent money on breakfast too), I decided to brew my coffee when I got to work.  Finally I ask, “Is the reward for spending this money worth the effort it takes to get that amount of money?”.  Usually the answer is no.

Hope this helps in your personal journey.  Good luck!!