Spending $1 Today Costs Far More Than You Think

Immediate satisfaction is a privilege that is more accessible than ever before since the invention of the smartphone and other modern technologies. In just a few seconds we can answer any difficult question with the help of Google, buy anything on Amazon, or even look up the exact time the solar eclipse will be at 100% coverage in just a few taps of our screens.

This need for immediate satisfaction is only becoming more prevalent as society moves forward together. I also believe this is the cause for consumer debt to be at an all time high in America today (consumer Debt is at $12.7 trillion!).

Today, if there is any minor issue or problem that occurs during our day, we take the quickest path to resolving it even if it is not the most economical.

Instead of taking the more affordable option that would require more time and effort, it’s far easier to whip out your phone and throw money at your problems.

So, instead of cooking dinner at home, we order food on Seamless. Instead of taking the long subway ride home, we get an Uber. The result of this behavior is that we waste our hard earned money for brief moments of relief.

Buying these brief moments of convenience will result in a lifetime of bad financial habits. Consequently, bad financial habits will cripple your ability to become wealthy and eventually Financially Independent.

Good financial habits will set you up for a high savings rate. The first step to achieving a high savings rate is to alter your financial mindset!

Before you make your next purchase, let me explain exactly what you are doing when you spend $1 today.

sunkcost

Sunk Costs – Time Spent Earning $1 – After Taxes

Spending $1 today has many implied costs that you are most likely not considering. The primary cost being the time you spent earning that $1. Time is the one resource that we can never make more of. You should treat your time with respect.

How much time does it really require in order for you to earn a single dollar? Let’s take a look.

For simplicity of math, let’s say you make $10/hour at your job and you decide that you want to spend $10 on lunch that day. How long did it take you to earn your lunch?

Clearly, it takes you 1 hour to earn enough money, $10, to buy your lunch today – right?

WRONG!

Taxes take a quick %20-%30 off from your paycheck. This means that every hour you work, you are only receiving about 75 cents on the dollar. That means that for every dollar that we negotiate for at our jobs, the government gets to skim a heavy percentage off the top.

It seems fair that we negotiate endlessly for our salary just so the tax-man can give my paycheck a major haircut.

Alright, after calculating for taxes with a little middle school math, you would earn your $10 lunch after 1 hour and 15 minutes of working – right?

WRONG AGAIN!

We did not even take into consideration the years of public schooling that was paid for by federal/state taxes. Also, we did not take into account the amount of money that was spent on our fancy college degrees.

We spend the majority of our young lives being educated for the purpose of adding value to society (i.e. getting a job). You cannot ignore the years of education and thousands of dollars spent on that education. These were real dollars that were invested in your knowledge and skills.

So, spending $1 (or $10) not only requires us to sacrifice a significant amount of time working at a job due to the government taking their “fair” share, but also implies that our 16+ years of education that helped us get a job was for the purpose of spending this $1.

Earning $1 took you over 20 years of your life to accomplish, just think about it.

Was the purpose of working your ass off at your job and in school to spend money on superfluous objects?

OR

Was the purpose of it all to live a meaningful and fulfilling life?

Externalcosts.jpg

External Costs Of Spending $1

Whether you are buying lunch, an article of clothing, a car, a house, or anything else in this world, there are external costs to the resources used to make the good and wastes that are a byproduct of that good.

These external costs are called “externalities.”

When you think of externalities, think of the smoker who smokes despite the harm it may cause to others from 2nd hand smoke. The harm to the victims of the 2nd hand smoking can be considered an externality.

Externalities, for the most part, are completely ignored when buying, making, or consuming a good. For example, let’s think about buying a t-shirt. When you buy a new shirt from your favorite clothing store, you don’t take into account the many resources required to make that shirt. The land used to grow the cotton, the fertilizer spent on the cotton crop, the excess fabric that was wasted when the shirt was made, the factory’s pollution when creating the shirt, the gas burnt for shipping the shirt here, all the workers that may have been harmed in the process, the water and detergent used to keep the shirt clean, and the final cost of throwing out the shirt in a landfill once it’s inevitably no longer wearable.

Externalities are a true cost whether you are directly impacted or not.

Every time you turn on your car, buy a shirt, order seamless, or participate in any consuming behavior, there are externalities that are imposed on the environment, people, and the world as a whole.

Understanding externalities are revelatory to becoming a better consumer.

After understanding how bottled water is made and produced (from the documentary titled “Tapped”), I absolutely refuse to buy bottled water and contribute to the externalities that are generated as a part of this industry.

Opportunity-Cost

Missed Opportunity To Invest $1

The most critical cost of spending $1 today is the missed opportunity cost of investing that $1. Instead of spending $1 today, an investment of $1 with an annualized return of 7% will turn your $1 today into $7 in 30 years, $15 in 40 years, and $29 in 50 years! 

**NOTE: If these numbers are surprising to you, simply look up ‘compound interest.’ After all, it is the 8th wonder of the world!**

Do you really need to spend that $1 today? Or would you prefer to have that $1 turn into something much more, like $29 in the future?

I have touched on this point numerous times and have no problem restating how important it is to invest – and to invest early!

I have several articles about investing, why I invest in stocks, what types of asset classes are available to the public, how to practice with a fake money portfolio, and why I choose certain asset classes over others.

Jacked Investing 101 – Introduction to how to invest

3 Investing Tips For New Investors – Invest tips for the beginning investor

Start Investing Today With A Fake-folio! I Show You How – Invest tips for the beginning investor

What Is A Retirement Account? Asset Classes Explained – Explaination how to look at mutual funds and explanation of asset classes

Value Investing! Why I Invested In Blizzard (ATVI)! – Bullish case for Activision Blizzard (ATVI) stock

Intel – The Best $35 Investment You Can Make Today – Bullish case for Intel stock

Beating The Market by Over 15% – In Only 3 Months! – My personal results from stock investments

The Calm Before The Storm – Earnings Season Incoming! – Understanding why and how the market moves.

Understanding Different Types of Stocks -Growth, Value, Dividend, Penny – a breakdown of all the types of stocks, pros, cons, do’s and do not’s

As you take your time reading the above articles, I would suggest these two pieces of core advice for the new investor:

  1. Being a long-term investor is redundant. Investors by nature are in it for the long haul.
  2. Avoid the pitfalls of emotionally reacting to a good or bad day.

Becoming an investor is a lifestyle change akin to that of a fitness enthusiast. Like working out, investing is not easy or simple, but is necessary if you want to be Financially Independent.

The Real Value Of A $1

The inequality wealth gap is becoming more pronounced as we move forward as a society. The rich are getting richer and the poor are getting poorer. There are numerous reasons as to why this trend has gotten stronger in recent times. My number 1 suspect of this wealth gap is the lack of financial education in public schools.

My hopes are to educate anyone and everyone willing to read my blog. Understanding the “value of a dollar” is a good first step in the right direction towards building wealth and reaching FI.

Let’s break down the real value of a dollar and the costs of spending money today. When you spend $1 today, the costs are:

  1. Sunk costs – The time spent on education and at work to earn the dollar.
  2. External Costs – The externalities from the production cycle and waste of the item you bought.
  3. Opportunity Costs – The most important cost of spending $1 today is the missed opportunity of investing the $1 for the future.

The next time you want to spend $1, stop and think!

Did you bust your ass in college and at work just to buy this thing you may or may not need?

Do you support the production and waste byproducts of this item?

Do you need to have this product today? Or would you rather invest and get potentially 29x the value of that item in the future?

The “value of a dollar” has been perverted by modern times and the core concept has been lost entirely in some cases.

It is my goal to reinstate this key principle that so many people have forgotten or have chosen to ignore. Do not misinterpret what I am saying here. I am not telling you to never spend a single dollar again.

What I am saying is that we all need to understand the situation we are putting ourselves in when we choose to consume now instead of saving/investing for the future.

Okay, this was a long post, but hopefully, it was as helpful as it was wordy.

Thanks for reading! – and as always if you found this article informative, insightful, or motivational, then please like, follow, comment, and SHARE!

-Jack

P.S. This is finance and investment advice for general education purposes. I have not considered your specific risk profile or particular life situation when providing this advice.

8 comments

  1. I’m 100% with you that this disparity is (at least partially) because of the lack of financial education in schools. That said, I ran a discussion group last year to talk about this stuff, and before the group started I gave a short talk to about 40 (college) kids to motivate the group. Only 4 of them joined and stayed. I know some of the FI bloggers have talked about this periodically, but do you have any thoughts on if this is a “you can lead a horse to water, but you can’t make them drink” scenario, or if there’s something else possible? (I have a post in my queue on this, if I can edit out all of the whiny rant-y stuff in there, but as a teacher I am always curious to hear others’ thoughts on financial education)

    1. I think that it’s difficult to reach out to people who need financial education the most. The people who are in dire need to financial education probably have bigger things to worry about. At least that’s what I think.

      I know for a fact that when I was in college, I did not care about money the same way I do today.

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