When many of us go shopping, we like to think of ourselves as smart shoppers. If we aren’t, we probably want to be. Particularly folks that read personal finance blogs.
Sometimes, out of convenience or laziness, we overpay for things. It isn’t just paying full price while not using a coupon; rather, sometimes we just buy things for which there are cheaper substitutes available.
The problem is that when we do this, we’re overpaying more than meets the eye! If we pay $1 more than we could otherwise pay, we aren’t just losing out on $1. We’re losing out on a lot more.
Let’s say you forget to use a coupon, or just flat out overpay for something by $1. No big deal, you might think.
Well, today that dollar may not be a big deal, when considered in isolation. However, we’re talking about two variables here:
- Time (today vs. future);
- Quantity (one purchase vs. aggregated purchases).
Let’s first look at time, which is the linchpin of this exercise. Let’s say that you save $1 today, and you take that $1 and add it to your investments. Let’s further assume that this extra dollar you save earns 8% per year.
Here is what that $1 can grow into, over time:
5 years: $1.47
10 years: $2.16
20 years: $4.66
30 years: $10.06
So, taken another way, a $1 impulse purchase is costing you over $10 well into the future. Sure, we could factor in time value of money, and a host of other variables – but the magnitude of growth of $1 is quite impressive.
Next, let’s look at quantity. When you look at how $1 can eventually become $10, it shows the impact that one smart decision can have. But what about the impact of making it a habit to make smart purchases? The more you take advantage of these seemingly small savings opportunities now, the better your financial future will be.
To illustrate, let’s say that instead of just saving $1 one time, you save a dollar a day for one entire 365-day year. In aggregate, that $365 saved during the year can grow to $3673 in 30 years.
Both of these factors – time and quantity – show how small savings today can add up and result in impressive amounts of money later.
What do you think?