## Wednesday, March 28, 2012

### Is \$100 a lot of money? (YES)

Even if you are making \$100,000 a year, \$100 is a lot of money, particularly for recurring expenses.

The other day, I was on a news site that was decrying the "injustices" of Smart Phone billing practices.  And I tried to point out, that you don't really need a smart phone, and the easiest way to avoid these staggering "injustices" is to just not have one.

Of course, the response you get when you say that, is, "Well, you're just POOR and can't afford one, and you're JEALOUS!"

So I pointed out that no, I am not poor.  And one reason I am not poor is that I don't have a smart phone.

Using the MoneyChimp Compound Interest Calculator, I pointed out that if you take the \$499 cost of the phone, plus the \$100-a-month user fee, and invested that, over 30 years at 7%, the sum total missing from your 401(k) would be \$125,086.16

The reaction to this simple calculation was interesting.

First, several people tried to shout me down that I had miscalculated the amount by slipping a decimal point.   And then someone actually did the math and, whoa, maybe I'm right.  The fellow who tried to shout me down actually apologized - first time I've seen that on the Internet!

Second, people tried to say the costs were less.  "I only pay \$69.99 for my plan!" one would say.  If that was true, that would bring the damage down to "only" \$88,687.74.   But of course, cell phone plans all have user fees, taxes, access fees, 911 fees, and fee-fees tacked on.   My \$69.99 plan routinely was \$89 or more every month - I don't know about yours.

But I think the number shocked them, as many young people go "yea, yea, yea, I'll get around to funding that 401(k) next year.  But the new iPhones are out!  And I have to have one!" and they fail to consider the real costs of an expense they view as "only \$100" a month.

And there are a lot of such expenses - unnecessary expenses - such as "getting a Starbucks," which a lot of my friends used to do (and I did, for a brief time) on a daily basis.   When you get done buying that \$3.88 double-tall Latte, and throwing the snooty Barista (a word not in the dictionary) a tip, you've spent \$5 on a 50-cent cup of coffee.   Over a year this comes to \$1825, and over a 30-year working life, it comes to a staggering \$184,458.30

Now bear in mind this is more money than most people have in their 401(k) accounts.  Maybe more than you have in yours.   It would be a sizable (and desirable) addition to mine, I can tell you!

And all from a \$5-a-day expense.

But again, the reaction I get from folks is again, interesting.

First, there is some lame-ass who says, "Well, you are assuming a 7% rate of return, which is impossible in this day and age!  Good luck getting that!  You might as well spend it now!" - and of course, that is just an idiotic post hoc justification for being a spendthrift.   Yes, you can get 7% rate of return on your investments - easily - over time.  If you look at one year of the market, well, that is pretty short-sighted.

The second reaction is, "Well, you could say that about any expense in your life!"

And that is the point - exactly.   Every expense in your life, particularly recurring expenses, like subscription plans or coffee habits, adds up to a lot of money over time.   One way to save a lot of money is to reduce or eliminate these sort of expenses.

A smart phone is a nice toy.  But is it worth \$600 (more than a new laptop!) and \$100 a month to use, all so you can text and twitter your online "friends" 24/7?

Ditto for Cable TV.  Do you really NEED to sit on a couch for 4.6 hours a day and be advertised to?

The point is, pick the areas of your life where you really WANT to spend the money - trying to "have it all" will make you bankrupt - even if you think you are wealthy.

We think we can afford these things, because "everyone has one" and moreover, "We're making good money" when in fact, neither proposition is really true.

Again, even if you are making \$100,000 a year, maybe \$10,000 of this ends up being "disposable income" after you've paid your taxes, living expenses, funded your retirement, etc.  Which in turn means that the smart phone ends up costing you 10% of your disposable income.

So yes, \$100 is a lot of money, particularly in a recurring expense, even for a "rich" person making \$100,000 a year.  (And in my book, people making \$100,000 a year are not rich, they are just making a lot of money.   If they save none of it, they are poor).

One-time expenses are a lot less dangerous, however.   For example, you want to go out to a nice restaurant.  It may cost a few hundred dollars, but it is not something you do every day.   I went to a fabulous Italian restaurant in Atlanta the other day.  The sort of place with valet parking.  We had two bottles of wine with dinner, four courses and dessert with an aperitif and espresso, and it was fabulous.  But not something I do every day.

Costly?  Perhaps.   But less costly that the fellow who spends \$15 on lunch every day at a restaurant, and maybe another \$30 on dinner, five nights a week.   And yea, people do this, using restaurants as their kitchens, convinced it is "easier than cooking!" and more fun.  But over time, they will eat a lot of really bad food (and food that is bad for you) and spend far more than I did, having a truly fabulous meal, maybe once or twice a year.

Recurring Expenses are what makes middle-class people feel poor and complain they are living "paycheck to paycheck".

If you are looking to cut your budget, cut those recurring expenses first.  And bear in mind that \$100 is truly a lot of money.

UPDATE 2020:  Since I wrote this in 2012, we've been pretty much forced to buy smart phones.  But instead of going to the "store" and signing up for a "plan" we bought used phones on eBay for \$99-\$149 apiece.  Beats \$1000 on a new iPhone!  A Galaxy S7 is actually easier to use than Apple crap, anyway.  Since we travel a lot, it works out well - we use GoPhone (now AT&T Pre-pay) to access the internet.   To offset the cost, we dumped our AT&T UVERSE service.  Yes, you can stream Netflix on your TeeVee using your phone as a "hot spot" and we've never gone over our "data cap" to date (more than a year now).  We dumped cable TV more than a decade ago.

Some folks have all the cable channels AND the latest smartphone and a "contract" plan AND a landline AND a wired internet connection - totally hundreds of dollars a month in service charges alone (even with these "bundle" deals).   You can "have it all" and end up having nothing!