True Cost of Holiday Shopping Calculator
Explanation:
Can you hear that sound? It’s the sound of purse-strings loosening everywhere, in anticipation of Chri- err… buy-buy-buy season.
So I think it’s a good time to share one psychological way that I try to manage my spending. It’s based on the fact that every dollar that you save now will be worth much more in retirement. Capitalism can work both for you and against you. To illustrate, let’s say you have a $100 sweater that you like.
If you took that $100, stuck it in a Roth IRA, and waited 30 years until retirement, how much money would you have then? Let’s say your investments return 8% a year. If inflation is 3%, then your money is still growing 5% a year in true terms. What does that mean?
$100 x 1.05^30 = $432.
So instead of $100 now, you’re really spending $432 from your own “future” money.
That’s the power of compounding. A $432 sweater? $1,000 MP3 Player? $7,000 Flatscreen TV? Maybe you’d think twice about how badly you want it. This is not to say Starbucks or the occasional splurge is never worth it. Perhaps it is. But I hope that this calculator can provide a different perspective while you are barraged by retailers to buy stuff you really don’t need.
Find more in Frugal Living, Tools & Calculators | 11/23/06, 1:20am | Trackback
November 23rd, 2006 at 7:12 am
My biggest problem with holiday shopping is not what I get for others, but what I wind up buying for myself. In past years it has been about 1:1, dollar wise! This will be the year I try and prevent those impulse shopping purchases.
November 23rd, 2006 at 11:29 am
I decided yesterday that healthy food is worth my money.
November 23rd, 2006 at 4:23 pm
Heather, I’m sure you’re not the only one fighting this
DM, You’re probably right quality-wise, I’d just try to make sure you’re not paying too much just for convenience.
November 23rd, 2006 at 8:01 pm
Prior to doing Christmas shopping this year, my wife and I set a budget on how much we want to spend. We’re expecting a baby in the next couple of months and plan to buy a new vehicle soon too.
As a result, we’re saving as much money as possible for these future expenses. In prior years, we didn’t set a budget and bought gifts for more extended family than I would have preferred. This year, only our “closer” family members are getting a gift and they aren’t as nice as in the past.
Setting a hard dollar amount as a our budget is already helping us in our gift giving plans.
November 23rd, 2006 at 8:35 pm
Little reality checks like this are great! However, we have to be careful to not scare ourselves into not living life now because we only save for the future. Jonathan, I know that’s not what you’re saying here, but I am curious: does anyone have a good way of balancing this?
For example, say I get $100 for signing up for a CC. What do I do with it? Save it? Spend it?? If I save it all, I don’t see an immediate reward — I might loose motivation. If I spend it all… then I’m not being financially responsible!!! So what’s the strategy? Maybe a 50-50?
November 24th, 2006 at 5:59 am
Miller,
I’d say that a 50/50 spending/savings ratio certainly isn’t bad. Part of it though is also what you spend your money on, not just how much you spend.
For example, if you get a credit card signup bonus of $100, save $50, and then spend the other $50 on stuff you otherwise never would have bought (stuff that wasn’t/isn’t in your budget) then that would be worse than if you hadn’t saved any of the $100, but spent it all on things that you always buy anyway in your normal budget.
I guess what I’m saying is that, for me, the way to balance your spending is to set a budget and stick to it. If you want to “splurge” from time to time, that is fine, but you should make that a part of the budget! Then as long as you follow the budget you know everything will be OK.
In other words, you will have already accounted for the occasional splurge, but at the same time you will have a set of rules and strict limits on what is and what is not acceptable — that helps to give the discipline you need to prevent overspending.
November 24th, 2006 at 7:30 am
Whatever happened to “holiday accounts”? You know, an account that you would put $100 a month into, and you couldn’t withdraw money from it until December (or whatever month you picked, but it was locked up for 11 months). You could pick the level of savings, and that way, just under a year later, you had all the money ready for holiday spending. It earned money-market interest, and since it was locked up you could “accidentally” spend the money early. I bet some smaller banks still offer these.
November 24th, 2006 at 4:40 pm
I bought a pair of $100 boots that didn’t fit right… so I’m going to return now. I now see my inability to pick the right size will save me $700 in 40 years!
Great post! Although I LOVE starbucks and it makes me just a teeny bit depressed that people might do this calculation before they make a purchase. A splurge once in a while is a-okay, I say.
November 24th, 2006 at 11:12 pm
Holidays are the best time to buy. I bought a few laptops for sale that i can make by reselling on Ebay. Hence, free money to buy for yourself. Some deals even save you money, e.g. Circuit city right now has a deal whereas you get $200 back for signing up to Vonage for a year when you buy an item for over $250.
November 26th, 2006 at 2:58 pm
Loved this calculator. I kept it in mind while doing holiday shopping, and I managed only to spend $5 at Forever 21 on a necklace and $1.67 on coffee on Starbucks (both purchased on a gift card). Total record for me on this holiday weekend.
November 28th, 2006 at 3:05 pm
[...] So the New York Times had this article about people who are making some serious money working in private equity, investment banking, management consulting, etc. Reading the article had two effects on me (one good and one not-so-good): 1. I am reminded even more how important it is to build the right network and qualifications that can get you a multi-million dollar job. If I can make $5 or $10 million a year for a couple of years, I can just take 80% of the after-tax amount and stick it in the market and buy a couple of properties in New York, San Francisco, or LA. And then I’d be SET. $10 million portfolio growing at a conservative 6% per year is $600,000. I can DEFINITELY live on $600,000 a year. Then I’d get a yacht and sail the world. 2. I am even less motivated to keep a tight control over my bottom-line. Mymoneyblog had a calculator that shows you how much your money would be worth in 20 or 30 years if you didn’t spend it on gifts this Christmas. The $150 cashmere wrap I’ve been eyeing would cost me $397.99 in 20 years, assuming a 8% return and 3% inflation. BUT, if I can get one of those jobs (and they’d be very difficult to get, to be sure, but it’s not impossible in my industry), then $400 won’t be a big deal AT ALL. Isn’t it so much more fun to increase your topline instead? Spending less than you earn is a lot easier (and much more enjoyable) when you earn alot. [...]
November 29th, 2006 at 5:00 pm
This is miseading because in the first case you get to have whatever you bought for 30 years while in the second case you get nothing for those 30 years.
Also, you might die before 30 years elapse, which you aren’t taking into account :).
November 29th, 2006 at 5:14 pm
I don’t know about you, but my latte’s last about 5 minutes
November 30th, 2006 at 8:24 am
I just don’t understand the “Latte Factor”. Starbucks has plain old coffee for a buck fifty. Maybe it’s an Asian vs lactose thing, but I don’t go for those blended drinks and foamy milk. The value added isn’t worth it.
I should probably rant about this on my own post.
December 12th, 2006 at 2:31 pm
[...] Jonathan has a nifty calculator on for holiday impulse purchases. It calculates the true cost of that item based on rates of return and time horizon, i.e. it calculates the time-value of the money. [...]
April 25th, 2007 at 9:11 am
I like the YoungFinances.com advice on the subject, especially when it comes to “bonus” money. Got a small inheritance from a grand-parent? a good tax return? a cash gift from the parents? a work bonus? Then I really l ike the 50/50 rule. Throw half in the bank for tomorrow and treat yourself with the rest.
Now, I’ve had all of these “bonuses” at one point and I’ve tried the alternatives
1. Blow it all;
2. Save it all;
3. Split and save half.
I always felt best when I did the split. I don’t know if 50/50 is the “ideal” number, but it’s pretty good.
However, when it comes to x-mas shopping, I just use the “baggie of cash” approach. I have a large family with lots of birthdays during the year, so I just set aside a certain amount of cash every month to cover the cost of gifts (b-days and x-mas). Money accumulates during the year X-mas is usually the great cleanout time.
The big key however, is that it’s not really the “choice” of spend vs save. I’m already saving, the money in the gift pile is there for the express purpose of buying gifts for loved ones. This way I don’t have to through the mental agony of “the money I’m losing”.
December 5th, 2007 at 11:23 am
Good advice…it seems like the balance would be…a $100 sweater - find something for less, unless you plan to keep that sweater as a favorite for several years and not buy another one like it. It will pay for itself if it doesn’t need to be replaced and you enjoy wearing it, etc.
The same for a flatscreen TV or iPod. How long and how often will you use it?
But the $4 Starbucks? (Daily??) That’s a true waste unless you are buying and selling Starbucks stock and profiting. Especialling wasteful considering the true value of a $4 cup of coffee. It’s Needless Markup.
August 28th, 2008 at 3:57 am
[...] True Cost of Impulse Buying Calculator Being smart with money is all about choices and priorities. Would you rather have another $300 iPod, or realize that with compound interest you could have an $2,000 more (inflation-adjusted!) later on. You’re not just saving $300, you’re shaving weeks off your retirement date! [...]
August 28th, 2008 at 7:28 am
I like the online savings accounts for accumulating cash for christmas and gifts (ING, HSBC, etc). I set it up to transfer $75 a month from my checking account, and that gives me enough for gifts througout the year plus extra travel, charity, and food expenses around christmas. The money isnt locked up like the old Christmas club accounts, but having it in a separate account is enough to keep me from using it for other purposes. Then i just do an online transfer into my checking account to fund the gift purchases. I started using that system a few years ago and now I never feel pinched at the end of the year.
August 30th, 2008 at 9:20 am
Great calculator, it really does put the “occasional splurge” into perspective as you said. I read the book “Your Money or Your Life” a while back and this calculator really helps illustrate the point very quickly.
Thanks!
April 4th, 2009 at 12:48 pm
Remember these are after tax purchases. Maybe a calculation for the income tax paid for the purchase if the money is put into a tax deductable investment? It is not just income tax either it is all the other expenses to earn the money (transportation, child care, clothing, other pay deductions and so on). It costs money to earn a paycheck.
April 19th, 2009 at 11:04 am
Instead of buying gifts for family and friends just because they will be getting you something, talk to them before hand and agree to not receive or give any gifts. Just have your usual food and company. I have been doing this for about 3 years. You would be surprised how much you can save. And so far, everyone seems to be happy with it. Really, spending the time with friends and family is more satisfying than all the gifts.