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« Help a Reader: Picking a Broker | Main | French Fries, Credit Cards, and Debt Psychology: The Behavioral Economics of Small Decisions »

March 30, 2010


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Yep, we consider the annual cost of all our regular expenses. That's how we decided to cut back on eating was costing us an extra $2500 a year!

We definitely consider the annual cost - especially on things that are subscription based.

We also consider how many hours we'd have to work to pay for things - That really seems to help us cut back on those impulse buys!

Yeah, I do annualized cost projections sometimes.

I think the purpose of such an exercise though, is to show, in a magnified time frame, how much something can cost over the course of one year.

So, for people who may not realize the concept, it will be useful because they may go "Oh wow! I had no idea how much that can end up costing me!"

At the risk of sounding like an arrogant prick, I'm not someone who needs convincing just to save a dollar or two each month. For that matter, there are certain expenses, even luxuries, that I don't mind spending decent money on each month. It just depends.

But that requires different kinds of calculations to be made. For example, I'm more interested in comparison shopping, and annualized cost projections may (or may not) play a part in that. I also may (or may not) use Total Cost of Ownership calculation here as well.

I also calculate in terms of whether a particular expense will fit into my budget.

Finally, I also try to examine how meaningful the product or service is to me, relative to the expense. I'm not sure how to calculate the last part, but the point is, I try to make every purchase the best value and as meaningful as I can muster.

I couldn't help thinking that this is the inverse of how many businesses advertise their products that have an annual or monthly subscription. How many times have you heard the phrase "... less than $2 a day!"?

Annual cost is one way I have looked at things when making purchase decisions. Example - $3.00 per working day on latte X 250 "working" days = $750 on lattes.

Taking that a step further, I look at how that could be invested, and what that would mean in about 20 years. $750 X 20 years = $15,000. The actual dollar amount would be higher of course, but for simplicity sake lets assume price increases = inflation, and that $1 today = $1 in 20 years (again, just for this example). When you look at $15,000 worth of savings in terms of today's purchasing power, just by cutting out the daily $3 coffee drink over the next 30 years, it puts things into perspective.

Another way to look at it is opportunity cost. For example, fo that $750 per year, you could take 2 fun wekend getaways during the year. Or, you could get small, partial season ticket package to your favorite sports team. You get the idea.

Cable for $19 a month???

Anytime I'm tempted to buy those designer jeans or shoes... working out how many hours I have to work to pay for them quickly brings me back to reality!

Another way to think about this is convert your housing cost into a daily expense. A $5k a month mortgage payment equates to $185 a day. $3000 a month rent is $100 a day... it really adds up!

Think about that when buying a $1 Million dollar house.


Don't forget the percentage that is siphoned off by taxes. And the amount that it would take in real money to cover the costs. A million dollars drawn down at 3% gives one $30,000 a year. How much do you have to have to cover your monthly subscriptions? I need slightly over $30,000 pre-tax to cover the cost of one year of my iPhone subscription (drawn down at 3%).

RobF --

It's actually $17 -- $19 with fees. ;-)

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