HOW MUCH ARE YOUR HABITS REALLY COSTING YOU
The new year is a time for change. Millions of Americans went to the gym for the first time in months this week. They also might have gone shopping to pick up a cart full of vegetables. Being that diet and exercise are by far the most popular new years resolution, you may have noticed this uptick in gym traffic. You may even be someone attempting some of these new habits yourself. If so, best of luck to you!
Other people may have decided to pursue a resolution in the second most common category… finances. They can vary; get out of debt, increase your income, build up your savings. There are a lot of things that can be called a financial resolution. Again, just like above, if you are one of the millions of people attempting to make changes to your finances, best of luck! I am here to help you. (I could actually help you with both if you’re interested. Once upon a time I was a 250 pound offensive lineman…
A big component to any resolution tends to be either the establishing of new habits, the abandonment of old ones, or a combination of both. While the consequences of bad health habits are fairly easy to see and measure, the full consequences of bad financial habits can be a bit harder to measure. While it can be easy to measure the immediate impact of impulse shopping, one rarely thinks of what the long term value of that splurge can represent. This article will seek to explore to long term ramifications of both good, and bad financial habits.
To keep the math even we will be exploring what each of these habits represents to someone who is 35 years old. We will also assume a 9% annual growth rate on any savings.
Bad Habit – Carrying a Balance on a Credit Card
As stereotypical as it may seem, we will start by taking a look at credit card debt, and the massive interest charges that come with it. It should not be news to you that credit cards charge an obscene interest rate on unpaid balances. Anywhere from about 12%-24% annually. Most everyone out there knows this, and is well aware that they should try to avoid credit card debt. BUT, the average American currently carries about $6,000 in debt on their credit cards.
If we start making those numbers real, this is what it looks like. At 20% interest that average person is spending $1,200 per year, just on the interest charges from the cards. That’s $100 per month, and they aren’t even making a dent in the actual principal. If they didn’t carry that balance, they would be freed up to put that $100 a month into a Roth IRA. Are you ready for these numbers to gets gross? By the time our 35 year old turns 65 and retires that $100 per month will represent $184,000.
While that amount certainly is not enough to retire on, it is definitely more than a drip in the bucket. Credit card interest is possibly the biggest plague facing our society.
Good Habit – Fund Your HSA Account
I’ll now give another profound bit of news. Medical costs in the United States are insane. What you may have never seen, is simply the raw totals of the spending. In 2020 the total medical spending for the United States was 4.1 trillion. Here is what that looks like. $4,100,000,000,000.00. The slight silver lining here is that a large portion of that expense was picked up by insurance and Medicare providers. The total out of pocket spending was only a mere 400 billion…. If we do rough math that’s about $1,200 per person of out of pocket spending.
HSA accounts allow you to save and grow tax free money to be used for medical expenses. Even if we negate the impact of tax free growth, and simply use tax free savings, someone who is using an HSA to pay those $1,200 per year will save about $300 a year, possibly more depending on their tax bracket.
Let’s input that into our same growth calculation, and if our 35 year old invests that $300 savings every year for the next 30 years, it totals out to $44,500. Again, to amass that $44,000 our average person did not have to save a single penny. They simply used their HSA to lower their tax bill and save that difference.
Bad Habit – Shopping Online When You’re Bored
We have all done it. You have some time to kill so you end up browsing deals and websites looking at things you don’t need. All too often, you end up buying some of those things you don’t need. This has become such a common occurrence in the modern era, that is has officially been given the title boredom shopping. It used to be lumped in with impulse buying until it got too out of hand.
The average American spends a whopping $1,300 per year buying things they don’t need. Or at least they didn’t know they needed it until they saw it and just HAD to have it.
My suggestion, download the kindle app onto your phone. Sign up for kindle unlimited and start reading books. Not only is it far better for your mind, you will end up saving $1,180 per year even after paying for the subscription. Doing so, would enable our 35 year old to have an extra $176,000 in retirement. Not to mention they would be far more well read.
Good Habit – Buy Used Cars
I’m not suggesting, you go buy an absolute clunker (though I think I have mentioned before that I inherited my father’s love for keeping old Japanese vehicles running well past 200k). It should be also noted that because of the covid related shortages, this advice isn’t super applicable. The chip shortages have severely distorted the price of cars to where buying new might actually make more sense than buying used.
In a normal market however, buying a brand new car is generally a pretty terrible investment. The amount of depreciation that occurs over the first two to three years of a car’s life can be staggering.
A new car that costs $40,00 will on average be worth about $23,000 three years later. A Drop of $17,000. Over the next three years, the value will generally drop to about $16,000. A difference of only $7,000. So, if you follow me here, buying the car when it is three years old will save you about $10,000 of depreciation.
If you are one of the people currently thinking in your head “sure, but old cars break down” think about this. The repair costs for a car in years 3-6 are virtually the same as one during years 1-3. If however you are the unlucky one who buys a lemon. That $10,000 savings is enough to replace your transmission. Three times…
If things go to plan though, this will save you about $3,000 per year. Plug that number into the retirement calculator, and our 35 year old retires with an extra $100,000. And again, they weren’t driving old beat up clunkers. They were driving three year old used cars.
Bad Habit – Overspending On Groceries
Self admittedly, I struggle here. My wife and I love to eat well. I wouldn’t say we go crazy when it comes to our grocery bill, but it’s definitely the area where we give the least thought to what we are spending. I learned something during Coved though. GROCERY PICKUP RULES.
The first time we did a grocery pickup order (for which the store by us doesn’t even charge us) I could not get over how much more convenient it was than browsing the aisles myself. We simply pulled up. Texted the number of our parking spot to the store, and boom.
As Covid continued, and we continued to use grocery pickup, I noticed something else. Our grocery bill was plummeting. I kid you not we went from about $1,000 per month, to under $700 a month, and we weren’t even trying. What happened? You may have already connected the dots here. Turns out, we were big time impulse buyers when it came to groceries. Walking the aisles and seeing the endless options made us want more and more items than we had initially put on our list. I always knew this was happening, but I had no idea it was adding almost 50% to our total expense.
What I also noticed was that I didn’t feel like I was missing anything. We still had all of the ingredients we needed to make our meals. All that was missing was the little extras that don’t matter anyways.
You probably know where this is heading. If our 35 year old saved an extra $300 per month… $120,000. All because of grocery pickup.
Good Habit – Ask For Raises
Have you ever heard the quote “You miss 100% of the shots you don’t take.”? It was Wayne Gretzky who said it by the way, not Michael Scott.
The simplicity of this one is crazy. Believe it or not, but the biggest reason employees do not get raises any given year… Is they don’t ask. I’m not saying you will get a raise every time you ask for one, but I can almost guarantee you that if you never ask, you’ll never get one.
In a labor market like we are in right now, if you aren’t asking for more money, you are leaving absolute piles of money on the table. There is a reason almost every fast food restaurant in your town is paying $15 per hour. They are desperate for workers. So is your company. They know full well how hard and how much it will cost to replace you, so now is quite possibly the best time ever to ask for a raise. The great part, is if your boss plays hardball, you can put out resumes and most likely have offers before the week is over.
Current inflation date has the rate at about 7%. Even if all you ask for is to keep your wages on pace with inflation that is a $3500 per year increase on a $50,000 salary.
Take that $300 per month and it will turn into around $120,000 by retirement.
Hopefully this little write has given you some options as far as ways to stretch your budget further, and put away a little more. But hopefully it has also given you an appreciation for the long term impact of seemingly small financial decisions.