Chances are, when you went to buy a car, you considered it through two lenses: the money you have, and the monthly payments you can afford. There may be a better metric, though: how many years of retirement it will cost you.
Figuring out how much your money will be worth by the time you retire isn’t an exact science, but we can estimate. As an example, say you cut $50 off your cable bill. Invested properly, and assuming a modest 7% average return over 30 years, that $50 every month would be worth over $60,000. If you wanted to live o $3,000 per month when you retire, that’s over a year and a half off your retirement funds. As finance blog Eyes on the Dollar explains:
I don’t want to deceive anyone into thinking we never spend money. We spend on lots of things. We put about $6000 a year toward travel. I buy organic milk and shelled pistachios. Jim got a new mountain bike last week, and we’re about to prepay for our skiing this year. Aren’t we hypocrites?
No, the reason is that we still think long term. I realize taking vacations or going to ski might cost us several years of retirement, but that is a sacrifice that we’re willing to accept. Driving a new car or having a manicure every month are not things we value enough to trade for years of work. I’m not trying to decide what things are important to you, but finally realizing the future value of our choices can be a huge eye opener. If everyone spent money out of value and not based on habits or what society says is normal, I think we’d all be much happier.
The shift in perspective doesn’t necessarily mean you can never buy anything expensive. Or even cheap. But the translation into years of retirement can help put an emphasis on what really matters. When you’re older, you may be glad you took that trip to Italy, but you probably won’t care much about what was on the Price is Right way back in 2014.
Photo by Dustin Moore.