Friday, 2 March 2012
It Costs How Much?
Of course, you should be looking for the best value for all of your purchases - 'comparison shopping' and looking for discounts. Sometimes you just need to control the 'urge to splurge' and hold off the purchase decision. Once you overcome that urge to buy, you may well be innoculated against the spending disease.
So here is a useful mind-trick to help you make a decision about that next purchase.
The trick involves a bit of mental arithmetic: you need to work out how much you would have to save to earn the purchase cost in annual interest (or dividends).
Let's keep it simple and use a 5% interest/yield rate; this means you have to multiply the purchase price by 20. A mental shortcut is to double the price and add a zero.
So something that costs £5 (or $5) would require: 5 x 2 x 10 = £100 (or $100) in the bank to generate the same amount of interest over a year. How much effort would it be to save £100 ($100)? Not negligible, is it?
Try a bigger purchase, say a new TV for £400/$400. That purchase price would be equivalent to the interest on 400 x 2 x 10 = £8,000/$8000. How much effort would it be to save that amount of money?
Once you have grasped this simple conversion logic of purchase price versus interest equivalent, a sobering truth hits you: NOT buying something is equivalent to saving the 'dividend-equivalent' lump sum.
And that will lead you to discover the true saving in avoiding recurrent expenses. If, for example you find you can do without something that costs, say, £5/$5 a week. How much is that worth in terms of an equivalent lump sum?
The calculation is: 5 x 52 x 2 x 10 = £/$ 5,200! Worth having (if only theoretically).
Do let me know if this helps your budgeting!
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.