If I were making a personal finance 101 cheat sheet, I don’t think anyone would blame me for placing compound interest right at the top of it, in bold letters.
I mean, compound Interest is the most powerful force in the universe, or so Albert Einstein’s Instagram account told me.
(There’s actually no proof Albert Einstein ever said this, but that doesn’t make the motivation posters any less motivating. And it doesn’t make compound interest any less impressive.)
But as amazing as compound interest is, if I were finalizing that personal finance cheat sheet, I’d place another, much less talked about topic, right underneath it:
Compound Spending in Action
Just like the incredible power of compound interest to build on itself, compound spending slowly works away to increase our expenses.
Stop me if this sounds familiar:
The gift shop deal
1. You’re browsing a gift shop when you see a super cool poster. Rather than taking a mental image and filing it away, you decide you need to own this piece. What good is simply appreciating something?
Besides, it’s only $20…
2. Once home with the artwork of your dreams, you realize the poster would never look right just thumbtacked on the wall. No, this beauty deserves a worthy picture frame. So you dig through your coupons and head to Hobby Lobby, where you find the perfect picture frame for $25.
Boom, just like that, the cost of your purchase doubled. Take that, magical doubling penny.
The Extra Bedroom
1. You’re shopping for a new house. Even though you’re like most people and spend 70% of your time in the kitchen and living room, you’d really like to have that fourth bedroom.
Luckily, you can have everything on your wish list just by stretching the budget a couple grand.
2. Time for the first home project – replacing the flooring.
Wait, at $10 a square foot, that extra bedroom means an extra $1,500 in remodeling costs!
3. Speaking of added costs, it’s a shame how property tax assessments are based on home value, which in turn is based on square footage. That extra 150 square feet from the extra bedroom means an extra $300 in taxes every year!
4. Ditto for home insurance.
5. And we can count on an extra $20 a month to heat and cool the extra space, aka $250 a year.
6. And we can’t leave that extra bedroom empty. We’ll need a $500 mattress, a couple hundred more in furniture, and wow… this $20 poster would be perfect!
The Sticker Price is Just the Start
These examples got pretty extreme in a hurry, and they’re also filled with a heavy dose of sarcasm. But that’s not to discount the very real possibility of compound spending sneaking up on even the most cautious savers.
We’ve all probably had an experience where “just one drink,” with a group of friends turns into four or five, which is then followed by a midnight trip to that greasy taco joint down the street, and topped with an expensive Uber ride home. Plus a pricey brunch the next morning to eat off last night’s headache.
Or maybe we received a “50% off any one item!” coupon to our favorite clothing store. Which was a great deal, right until the rush of the deal had us adding an extra 3 pieces (with accessories) to our original shopping plans.
And I know I’ve fallen victim to an AMAZING deal on airplane tickets… which quickly compounds into a couple hundred dollars spent on hotels, a rental car, and then a week’s worth of vacation spending.
Ever wonder why credit card companies are so eager and willing to give out free travel points? It’s simple – they understand compound spending.
Companies know better than anyone – a little spending leads to a lot of spending. Sometimes just a little taste is all it takes to get hooked.
Staying on the Path of Happiness
Confession: I’m an internet junkie. I’m addicted to the idea that the entirety of human knowledge sits at our fingertips every day.
With one click of the button we can be transported to the renaissance teachings of Aristotle, the futuristic predictions of NASA, or even just some 20-something’s blog about wizards and financial freedom.
On the whole, this curiosity is probably a good thing. It keeps me reading, learning, and improving. But there’s also a dark side to my love of the internet.
And no, weirdos, it has nothing do with dirty websites.
The challenge is, I have to stay focused whenever I’m using the internet. If I don’t, I’m liable to blink and realize three hours have passed, and a little light reading about vanguard index funds somehow devolved into a detailed video analysis of the latest Christopher Nolan movie. How did THAT happen??
I veered off course, one thing lead to another, and soon I was tumbling down the teserract of distractions.
Staying the course with our financial goals is pretty similar.
On the whole, we can realize that we’re already 1-percenters and that money is an amazing tool for building freedom. But with a little distraction, we can easily veer off the path of happiness and step towards the Vegas-style flashing lights of temptation. And whenever we do, we’re inevitably building ourselves a lengthy domino of spending.
So, the best way to control your spending? Stop it before it starts.
We have to recognize that cheap or free isn’t always cheap or free. In fact, it’s typically the kickstart to a whole new host of expenses. And we have to recognize that justifying our purchases with a low sticker price is faulty logic.
We have to learn to say no, even when every fiber of our being lusts for yes.
Why? Because the sticker price is a lie.
People think I’m crazy when I turn down free trinkets. “But it’s FREE,” the peddlers remind me.
But it’s not free, I think to myself. Sooner or later our stuff will get the last laugh, whether it’s maintenance costs, moving expenses, or just the silent stress of a cluttered life.
Instead, we can reverse the currents. Rather than racing down the path of spending, we can avoid tipping that first domino.
We can say, “No thanks, I’m already happy.”