How Much Freedom Are You Stealing From Yourself?

Let’s say you broke down and bought yourself a new fat bike (guilty as charged).  Maybe you just can’t live without your daily $5.00 latte or your premium cable package.  These might seem like relatively innocuous purchases, but the real cost of these items is much higher than the face value.  Why is that?  Because if you invested that money instead and let it compound over many years, it would become a much larger sum.

The Rule of 72

We can do some quick easy math with the Rule of 72.  Basically, this rule helps you estimate the doubling time of an investment.

Time for an investment to double in value = 72 / (interest rate)

So, if you expect (hope) to get a 7% rate of return on your investments each year, then the time for an investment to double will be approximately 10 years (72/7). More to the point, if instead of making a large purchase, you had invested the money instead, it’s value would double every 10 years.

How much did that fatbike really cost?

Now back to the fatbike.  If instead of purchasing that $3000 fat bike at age 35, you had invested the money, this is how much it would be worth over time using the rule of 72:

At the typical retirement age of 65, that $3000 investment would be worth $24,000.  Let’s hope you really enjoy fatbiking, since it is essentially the same price as a nice new car!

How much would that new car cost?

Speaking of cars, let’s say you feel the need to buy a nice fancy new car for $25,000 at age 35 (also guilty as charged).  The numbers are even more staggering:

That’s almost a quarter of your entire retirement!  This ignores the additional cost of financing the car, or even the likelihood of purchasing another new car every 5-10 years.

What about that latte?

If you purchased a $5.00 latte every day for a year, that would essentially be a $2000 cost per year. Ignoring the fact that you are likely to continue this indefinitely throughout the years, even that seemingly small cost per day gets out of hand really quick:

Stealing your freedom

Since financial freedom is essentially a number, everything you purchase is delaying your freedom, and delaying it by much more than you probably imagine. We all spend money.  Just make sure you understand how much things REALLY cost down the road, and make sure you evaluate whether your spending  is really increasing your happiness and expanding your life experiences, or whether it is simply a junk expense that it stealing your freedom.

What do you think? Have you ever thought about the real cost of your purchases?  Which things will you continue to purchase despite knowing their true cost, and which things will you ax out of your budget?

Remember, it’s not about the Money; It’s about the Freedom