Swing Coach

But little treats start looking pretty expensive when you add up how much you spend on them in a year."

That sentence is from a flyer included in a financial statement my daughter received recently.   Who can argue with it?  Undoubtedly it is true.  But so is buying gasoline or groceries, living in a house or wearing clothing. . . !  The fact is you finance everything you buy.  More on that, but first let me share more from the flyer.

"You work hard for your money, so it's nice to reward yourself with small, inexpensive treats.  Maybe you stop for a double mocha cappuccino on the way to work or download a movie or some songs to enjoy later.  Or you might like to eat out or go to the movies on a regular basis."

It is my opinion that one reason people do not save more is the guilt approach to budgeting (see above).  In general, it reasons like this:
If you enjoy it, it is (by definition) a waste of money and you should cut it out.

I confess, I do not want to live that way.  My wife has a philosophy about her best linens, china, silverware and crystal.  Don't die and never have used them.  Yes, they may be ruined by that toddler, or damaged in the dishwasher.  But there is more satisfaction in using them than in keeping them stored out of sight.

You finance everything you buy.  Either you borrow money to make a purchase, or you use your own cash.  And when you use your own cash the money is gone for good.  You also lose, therefore, the earnings potential of those dollars over time.  That is called opportunity cost.  I agree that you should keep in mind opportunity costs, and avoid frivolous spending.  But enjoying life is somewhere above frivolous on my value scale.

The strategy for increasing savings I recommend begins with eliminating or reducing unnecessary wealth transfers.  An example comes from a college planning family I worked with in 2011.  Their mortgage was at 8% interest when the rates (at the time) were below 5%.  With more than 20 years remaining in the amortization, a 40 percent reduction in the rate of interest made a significant difference in their monthly cash flow.  The bonus?  There was no interference to their lifestyle.  With several hundred dollars per month re-directed towards long-term savings the future also looks much brighter.

Mortgages are only one place we look for transferred wealth and lost opportunity cost.  Qualified plans, taxable accounts. consumer debt and college costs are also veritable gold mines of money for wise wealth creators.

If what you think is true turns out not to be, when do you want to know?