## The real cost of a can of coke

If you spend a dollar it costs you a dollar right? Not necessarily...

It depends on what you would have done with the dollar if you hadn't spent it.

Inflation erodes the value of the dollar over time. So in thirty years (at 3% inflation) $2.43 will be needed to buy what you could buy for a dollar today.

Hence spending a dollar now costs you less than a dollar in 30 years, if you leave your dollar coin sitting around in a drawer somewhere.

But what about if you invest the dollar. Suppose you manage to get 10% per year interest on your dollar (the stock market's historical average). Then in 30 years your dollar will have become $17.45.

Your money will have increased by a factor of 17.45/2.43 = 7.18.

I haven't yet decided on a timescale in which I plan to save my million. If I chose a timescale of 30 years (i.e. by the time I'm 55) and if I could earn 10% interest per year, then what are the implications of the factor of 7.18 increase?

Basically, any dollar I save now would actually give me the equivalent spending power of $7.18 (in today's money) in 30 years time. And so any dollar I spend would effectively cost me $7.18.

This gives an interesting way to look at my day-to-day purchases. Am I really prepared to pay $2.20 * 7.18 = $15.80 for a can of coke? Probably not. And am I prepared to pay $25 * 7.18 = $179.50 for a CD? Again, probably not.

So if you want a way to talk yourself out of unnecessary purchases just think about what it is really costing you.

It depends on what you would have done with the dollar if you hadn't spent it.

Inflation erodes the value of the dollar over time. So in thirty years (at 3% inflation) $2.43 will be needed to buy what you could buy for a dollar today.

Hence spending a dollar now costs you less than a dollar in 30 years, if you leave your dollar coin sitting around in a drawer somewhere.

But what about if you invest the dollar. Suppose you manage to get 10% per year interest on your dollar (the stock market's historical average). Then in 30 years your dollar will have become $17.45.

Your money will have increased by a factor of 17.45/2.43 = 7.18.

I haven't yet decided on a timescale in which I plan to save my million. If I chose a timescale of 30 years (i.e. by the time I'm 55) and if I could earn 10% interest per year, then what are the implications of the factor of 7.18 increase?

Basically, any dollar I save now would actually give me the equivalent spending power of $7.18 (in today's money) in 30 years time. And so any dollar I spend would effectively cost me $7.18.

This gives an interesting way to look at my day-to-day purchases. Am I really prepared to pay $2.20 * 7.18 = $15.80 for a can of coke? Probably not. And am I prepared to pay $25 * 7.18 = $179.50 for a CD? Again, probably not.

So if you want a way to talk yourself out of unnecessary purchases just think about what it is really costing you.

Comments:

<< Home

Using the $7.18 as a factor for each current $1 won't work since interest is compounded. You're dealaing with exponents, not multiplication. The cost of a CD now will cost you much more in lost opportunity cost than $20 * 7.18.

But it's a good thought. Good luck with your goals.

Post a Comment
But it's a good thought. Good luck with your goals.

<< Home