When it comes to money, we all know that some of us our savers and some of us are spenders. Count me in the saver group. While I would like certain material things, the desire for financial safety and a degree of risk aversion with savings gets me to control those wants for the most part and live within means.
Having said that, if somebody truly is a saver, it doesn’t take away from the need to use one’s brain and critically think about certain decisions. If we go on autopilot, we can lose sight of some decisions that can be made to help our finances that are right in front of us. Additionally, if somebody is in a relationship with a serial spender, it’s even more important to keep one’s eyes open to opportunities to save.
Along those lines, one of the things we can keep aware of, in order to help our finances, is the opportunity to save money through substitution.
To what am I referring here? Well, substitution in the context of personal finance and spending means finding an alternative choice for a product or service that will cost less. Sure, it might not be the exact same thing as the original choice, but you can get something of value for far less in many cases. Over time, small savings add up to big amounts.
So, if you’re trying to keep an open mind to saving, or are hoping to get someone else to think more about their spending decisions, do some math and see what things are really costing you.
Here is an example of the impact of substitution, based on just 5 expense modifications.
1) Buying a $3 coffee drink once per week instead of 3 days a week.
- Original Cost: $468 annually
- New Cost: $156 annually
- Savings: $312 annually
2) Bringing lunch from home one extra day per week (estimated $4 cost), instead of eating lunch out that day (estimated $7 cost)
- Original Cost: $364 annually
- New Cost: $208 annually
- Savings: $156 annually
3) Getting a free movie from the library instead of going out to the movies ($20 for two), once per quarter
- Original Cost: $80 annually
- New Cost: $0 annually
- Savings: $80 annually
4) Getting a $20 haircut slightly less frequently, say once every 4.5 weeks (just over 11 times annually) instead of once every 4 weeks (13 times annually)
- Original Cost: $260 annually
- New Cost: $220 annually
- Savings: $40 annually
5) Buying a generic OTC monthly medicine at $10, versus a branded medicine of a bioequivalent comparable at $20
- Original Cost: $240 annually
- New Cost: $120 annually
- Savings: $120 annually
There you go – that’s 5 very simple, easy, painless cuts that one can make and not really notice much difference in day-to-day life. Total annual savings: $708.
Once could take this further and imagine investing that $708 and getting a good annual rate of return, at which point that money will grow to be something much more significant. If the post-tax rate of return far exceeds inflation, this amount could compound and grow to be somewhat significant. All that for just a few minor, super easy changes. You could also think about the opportunity cost of that spending, and what else you could buy with that money – but let’s stick with the savings and compound growth story instead 🙂
Of course, these are just examples. We all have different expenses. But the point is that with just a few easy substitutions, we can make our finances better over the long run. Using examples like this can help make it hit home for us as well as a significant other who we hope to see curb his or her spending!
My Questions for You
Do you ever think about how making small changes can add up to big savings over the long run?
What changes have you made to your spending habits that have made a difference?
Do you think that such examples could help influence another person to make some simple changes in spending habits?