We humans are perfectly capable of and often adept at convincing ourselves that certain spending habits are financially harmless. Typically, that is based on the benchmark of a single, stand-alone purchase. We rationalize that one purchase is insignificant compared to our long-term financial goals. And guess what? In most cases, we’re right! However, one of the problems with the single-purchase benchmark is it enables, if not encourages, us to ignore the long-term impact of the specific behavior. This can lead to some destructive financial habits.
Using a macro lens is most applicable for relatively cheap, recurring purchases. The most oft-cited example is a cup of coffee. If I had a dime for every time I’ve read about how much money giving up coffee from my daily routine would save me, I would’ve reached my financial goals five years ago! All joking aside, I’ll reframe the coffee example below. Then I’ll discuss the conclusion we could draw using the single-purchase (micro) framework versus the annual or even lifetime purchase (macro) framework. Point of clarification before we move on: I’m not knocking a daily cup of coffee—we all have our vices, and some are worse than others. If coffee is a priority for you, please continue to enjoy! Just be aware of the long-term impact that spending has on your goals!
Let’s say your goal is to save $50,000 in a retirement account. A $5 iced mocha latte is equivalent to 0.01% of your goal—indeed, that single purchase is a minute percentage of the end goal. Based on that ratio, one might assume the iced mocha latte is harmless. This is micro-level thinking. But let’s take it a step further and think at the macro level instead. Ignoring the impact of future inflation on the cost of lattes, over a hypothetical 40-year career, if you bought one latte per workday you would spend $50,000 (1 latte / workday x 5 workdays / week x 50 weeks / year x 40 years = 10,000 lattes x $5 / latte = $50,000). Think about the magnitude of the once-a-day purchase of a $5 item! The total of all those daily purchases would fully-fund your retirement goal of $50,000. Now that is macro-level thinking! Plus, it can be applied to any spending—not just coffee and not just daily expenses.
So, what do you conclude from this? What changes do you make using that macro-level data?
- Do you cut back to Monday, Wednesday, and Friday for lattes? This would mean you spend $30,000 in 40 years, leaving $20,000 that could be contributed to your retirement account.
- What happens if you save lattes for a Friday morning treat? Under this scenario, you would spend $10,000 in 40 years, leaving $40,000 to put toward your retirement savings.
- Maybe you decide to buckle down and skip lattes altogether, instead funneling that money into your retirement account each month. For the sake of rounding, let’s say there are 20 workdays in a month at $5/day, meaning you deposit $100/month. After 40 years of doing so, with a moderate rate of return of 5%, compounded annually, you would have $148,856! Super saver!
- Perhaps you don’t change anything at all and continue to buy 5 lattes per week because coffee is an absolute necessity for you! And that’s okay—again, just realize you have to find that $50,000 elsewhere in your spending to hit your goal!
