The real cost of an item is not just the number that appears on the price tag.
The Real Cost
Before buying anything, it is important to know the cost of that item. Not the amount etched on the price tag, but the actual cost. The actual cost to you!
The philosopher Thoreau said: The cost of anything is the amount of life you exchange for it.
This profound quote re-frames the buying decision.
You don’t pay for an item with money. Instead, the real cost of an item is the amount of time (basically the amount of your life) you spend to make the money needed to buy that item.
If an item costs $1,000, you are not paying $1,000 for it; you are paying the amount of time of your life that you will need to earn $1,000. If it takes you a week to earn $1,000, you are exchanging a week of your life for that item.
Nothing in this world can replace time. You only get one life, and that too with a limited amount of time. Every buying decision, therefore, is not about paying with money.
Instead, every buying decision is about paying with a part of your life.
A coffee a day…
I used to buy a cup of coffee on my way to the office and another one in the afternoon. After seeing the above quote, I began to wonder … how much of my life am I exchanging for this coffee? And is it really worth it?
A cup of coffee at Starbucks costs about $2.50. Assuming an average life span of 80 years, one would end up spending $109,500 on coffee (60 years of adult life x 365 days x $2.50 x 2 cups). The average income in America is about $50,000. So in effect, one would end up exchanging two years and two months of their life for the coffee.
Now, if you have an undying love for your coffee, this exchange may seem reasonable. The key is to think of this concept before buying anything. If you are okay with exchanging part of your life for a given item, then by all means, buy it.
The process of thinking in these terms is important, not the outcome.
Going back to my coffee example, when I used this process, I did not give up coffee completely! Instead, I reduced my coffee consumption from two cups to one cup a day. I was okay with about half of the cost.
Upfront cost vs. Total cost
Coffee is a relatively inexpensive item, and it can still cost more than two years! People buy many more expensive items without even thinking about the extra years that will add to their working life.
And it is not only the sticker price we pay while buying something. Several other costs follow. For example, consider purchasing a car. In addition to the cost of the vehicle, there are costs for servicing, insurance, petrol (gas), parking, running costs (car wash, tire change, air), tolls, registration, etc.
There are non-monetary considerations that we should also account for with every purchase. In the coffee example, it is not just the cost of the coffee itself. It is also the time and gas spent on getting the coffee, the sugar and dairy in the coffee, the lack of sleep it causes, etc.
So the actual cost of something is usually much more than the upfront cost. We should factor in all these costs when considering the amount of life we exchange for something.
Related Article: Lifestyle Inflation and How to Avoid it
About earning money
The Thoreau quote does not apply only to spending but also to earning money. For example, when you take up a new project that pays $1,000 for a week, you have to make the decision – is it worth giving up a week of your life to earn that $1,000?
If the answer is affirmative, proceed with the project; if not, reconsider your decision.
Many people traverse their entire life without contemplating this question. Living your life making money to spend money is like being on a hamster wheel. There is no progress, and it always ends in the same place.
Thoreau himself believed that one should earn only as much as is needed to do the things one wants to do in life. For him, earning money just to be able to spend money did not make any sense.
There is no bigger blunder than people who spend the greater part of their life getting their living.
Henry David Thoreau
In conclusion
Saving money is not easy. It is much easier (and more fun) to spend money!
However, Saving is the most important way to get to Financial Independence.
By recognizing that every purchase involves an exchange of life itself, we can make more mindful choices, leading us toward financial security and a richer, more meaningful life.
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Money can serve many purposes.
It can be used
1) to buy things for consumption.
2) to buy objects that convey status (Rolex, Ferrari, Cartier diamond necklace).
3) as a way to keep score, such as on the Forbes 400 list of richest people in the world.
4) to buy other assets — a house, an academic degree, a mutual fund.
The purpose that money serves will be dependent on the values you adopt and the choices you make.
There is one another use of money that often gets overlooked:
Optionality
1) When you have sufficient financial reserves (note: I said reserves, not income), you get more options in life.
2) If you find yourself re-assigned to an abusive boss during a company re-organization, you have the option to walk away rather than remain in a hostile work environment.
3) If you get suddenly laid off due to factors completely out of your control, you have the option to find a new job that fits well, rather than being “forced” into taking a short-term gig that deviates from your long-term goal.
4) If you have a major medical problem, where you’ve exceeded the coverage of your medical insurance, or you don’t want to sit on a waitlist for a life-saving procedure, you have the option to get the best care possible, as opposed to that which others have decided is appropriate for you.
5) If you find yourself in a physically harmful romantic relationship, you have the option to get yourself to safety without considering the economic costs of doing so.
Having financial reserves gives you options (regardless of income level).
At the same time, anytime you spend your resources on something else, it erodes your reserves and thus your options.
Thank you! That is a great summary – Optionality is an important benefit.
This is especially true after reaching Financial Independence (FI) – the degrees of freedom in your life increase multifold. However, you don’t even need to get to FI, even having a financial cushion can give you a lot of options in life.