Thursday, July 3, 2008

What does that iTouch or Fendi really cost?

Here's a startling fact for all you Starbucks aficionados: Did you know that if you bought a latte at $3.78 a pop every day for a year, it would cost you $1,332.25? Not bad, especially since many of us -- me included -- rely on a caffeinated kick start at the beginning of every day. But your daily caffeine drip habit starts getting expensive when you consider that if you invested that $1,332.25 in the stock market, it would become about $39,914.11 in 30 years (assuming a yearly realistic return of 12% on your money). 

I know. It sounds so sensationalistic and you're probably rolling your eyes right now, thinking that any purchase in your life could be put into such terms, and so what? You like buying a coffee every morning, and you're entitled to spend your money on whatever makes you happy, right? I don't blame you for having vices; we all do. (One of my many money-spending habits is buying lip gloss. How many tubes of pink strawberry or iced mocha lip gloss does one girl need? Just ask Target, since I can never seem to leave the store without at least one new lip gloss.) 

Anyways, the point is that I know where you're coming from, and I'm in no way trying to curb your spending. I don't condone denying yourself of what you like, and if that includes buying a tube of lip gloss every weekend, then more power to you. But when you're standing in line to buy that latte, don't think of it in terms of how much it individually costs ($3.78), think of it in terms of:
  • What it really costs (in the long term). Think of the returns you could lap up if you denied yourself a Starbucks fix every other day, or a month or two at a time, and invested your latte dollars instead of drank them.
  • What is the total cost of ownership of said latte?
If you're making $50,000 per year, one latte every now and then will not break the bank in terms of your total cost of ownership, or percentage of your overall income. But if you're making $30,000 per year, a year's worth of lattes ($1,332.25) quickly becomes 4.44% of your annual income. Kind of shocking, huh?

Okay, enough with the latte analogy. Total cost of ownership really becomes fabulous when you start using it to decide about a large purchase, such as a designer Gucci or Prada bag, a new Audi, or an iPhone or iTouch. Before you hand that credit card over (or even better, cold hard cash!) do you really know what your new iPhone will cost you?  

Let's say you make $35,000 per year (about $29,000 after taxes). A $200 iPhone would only be 0.69% of your annual income. Not bad, right? But wait till you start considering the big purchases. With that same income:
  •  a pair of Rock and Republic jeans is almost 1%, 
  • a $600 flat screen TV is over 2%,
  • a $1,620 Louis Vuitton bag is about 5.6%,
  • and a used $18,000 Honda s2000 is  62% of your annual salary.
I gave a salary of $35,000 because stats show that it's usually 20-somethings in this income bracket that tend to spend the most money on the excesses: nice cars, designer sunglasses or clothing, the newest tech gadgets and spring break trips to Cabo San Lucas.

But contextualizing costs in terms of a total percentage of your income really puts things in perspective, especially considering that the first 3 of these 4 items are considered "frivolous" and not necessities. (If you need a car, even the 4th can be substituted for an older model, cheaper substitute.) Again, I'm not saying don't spend money on what you like. If you love buying 7 for all Mankind jeans (as I do) or buying a latte with the occasional pastry, then forge ahead with your caffeinated denim endeavors -- don't deny yourself of what you love.

But if you're going to be a gal on a budget, just be conscious of what your purchases are truly costing you because it's never just the number on the price tag. There's a difference between being cheap and being frugal. Cheap people just look at cost; frugal people look at value. No one likes being cheap, so forge ahead frugally!

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