We all know small spending habits add up, but they might add up more than you think. It’s easy enough to come up with a monthly calculation of how much we spend on a pack of cigarettes or a cup of coffee every day. But what about the opportunity cost of that spending?
When figuring out exactly how much your spending habit costs, it helps to consider what you could be doing with that money instead. The opportunity cost of your spending is the profit you could’ve gained by doing something else with the money (like investing it).
Let’s say, for example, you have a muffin habit. You want to see how much you could save by nixing that habit. You spend eight bucks a week on muffins, and that’s about $429 a year you could save. In two years, that’s about $850. But what if you also invested that money? How much more could you earn? There’s a calculator that makes it really easy to see how much your habits add up, opportunity cost included.
Hugh Chou, a Systems & Network manager at Washington University, developed a “muffin calculator” to see how much a small spending habit can add up over time. At his website, he writes:
I was once interviewed by Sharon Harvey Rosenberg who admitted her spending weakness to me — gourmet muffins. At $2.75 each three times a week, I realised she was eating nearly the equivalent of a brand new Dell desktop (including a flat screen monitor!) every year in her purchase of muffins. I know I would much rather have the desktop, but hey, I’m not that big on muffins…
Of course, you can use Chou’s calculator beyond muffins. Just enter the price of your habit, how many times a week you indulge, the number of years and the investment yield (the calculator’s yield is set at five per cent). The calculator takes the yield and compound interest into consideration to give you a better estimate of how much cutting back on a small habit can save you over time.
Check it out for yourself at the link below.
Sharon’s Muffin Calculator [Hughcalc.org]