Small Expenditures Are Hard To Contextualize.

The Bank of Montreal today (25 September 2012) reported that Canadians spend $3,720 per year on impulse purchases.  Not so good for the savings plan but possibly they are mental health treatments.  Buying something just because you want it cheers up an otherwise bad day.

Besides, impulse buying may be among the least of the self-sabotaging financial behaviours.

A 100-foot fall will kill me, but a 1-foot fall repeated 100 times will have no effect.  The opposite of this is true with budgeting, which is an important part of financial planning.

If I had to buy a Starbucks or Timmy card once a year, I would likely relate to coffee shops differently.  If I spend $4.00 per day in coffee shops, I spend $1,460 per year.  The money drifts away without much conscious thought or effort.  If I were required to spend $1,460 in a single transaction (the 100 foot fall) or do without coffee shops, I would do without.  A walk around the block would replace the trek to the coffee shop.

The same thing happens with lottery tickets, cigarettes, magazines, cable channels, cell phones, chocolate bars, and many more.  Marketers have learned that people will spend a bit of money many times, far easier than they will spend a lot of money once.

People do not lose their money in a rush like water over a broken dam, they lose it drop by drop, like a leaky tap.

Why do you suppose people lease over 50% of all cars delivered?  Because $500 a month is less than $40,000 once.  If leases were unavailable, the $40,000 barrier would probably turn the purchase into a used car for $15,000.

In respect to small repeated purchases, how much do you spend annually?  That is the threshold for meaning?  It is different for each of us.  Some of us don’t like to break a hundred dollar bill.  Others among us don’t like to break a Toonie.   Establishing your threshold of meaning and deciding what to do about it is an important part of financial maturity.  Spend some time and negotiate it with yourself.

Just so you can pay for the time you spent reading this, check out your life insurance or disability insurance premiums.  (Except Universal Life.)  If you “conveniently” pay them monthly, the insurer is charging you about 1.4% per month on the deferred amount.  It is close to a month’s premium per year.

I will bet the interest rate on your line of credit is less than 1.4% per month.  Probably less than .4% per month.  Call your agent and use the line of credit to pay annually.  You will save about 6% or more of the premium.

Then take your savings and download some smooth jazz from iTunes?

Pax

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Contact: don@moneyfyi.com  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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