Everyday Cheapskate: Annualizing Your Spending: The Key to Financial Freedom

Most of us prefer to think of spending money in ways that don't make us cringe. I suppose that's only natural. If we could truly see how every little purchase adds up in the grand scheme of things, maybe those "just a little treat" splurges wouldn't feel quite so harmless.

Take a page from Howard Schultz's book -- literally. In "Pour Your Heart Into It," the Starbucks founder noted that the average Starbucks customer used to drop $3.50 per visit and show up 18 times a month. Fast-forward to 2024, and those numbers have shifted where the average customer spends about $5 per visit and shows up around 16 times a month. Now, I'm pretty sure these folks think of that as a series of harmless $5 coffee dates rather than a $960-a-year relationship with their barista. But, oh, how those little indulgences do add up when you're not looking.

Here's a little trick: Start thinking about the annual cost of things, and you'll find it's a great way to get those mindless spending habits under control before they take over your wallet.

The rule is simple: Take any monthly expense and add a zero (that takes it to 10 months), then toss in a little extra for good measure to get it up to 12 months. Get it? Add a zero plus a little.

Let's say you're dropping $5 a week at the office vending machine. That's about $20 a month. Now, add a zero ($200), then add a little extra ($50) for a total of around $250 a year. Not bad for an off-the-cuff calculation! And just in case you're wondering, the real math checks out: $5 a week times 52 weeks is $260. See? Adding a zero plus a smidge does the trick.

Let's look at another example. Our friend Helena gets her nails done (filled, maintained, repaired) once a month at $80 a pop (I'm going on current U.S. averages here). Now, multiply that by 10 and add a little extra, and suddenly she's staring at a $1,000 annual manicure habit. If you're thinking, "But it's just a little something I do for myself," I hear you! But knowing the true cost is a real eye-opener, especially when those little things start to add up. Consider this may be one of those things she's paying others to do that she could easily learn to do herself. Not judging here -- just a nudge to keep it real.

It's not just about spending, though. We also tend to think of our income in the most generous terms possible -- because it hurts less that way. Take Tom and Susan, for example. They're living the dream, thinking they have a $100,000-a-year safety net. "We make six figures," they tell themselves, "so why shouldn't we enjoy a few luxuries?"

Well, here's that reality check: Tom actually makes $96,500, which is close but not quite the golden $100,000. After taxes and other deductions, his take-home pay is more like $78,000. And once you factor in the essentials -- food, shelter, insurance, transportation, clothes, utilities, property taxes, entertainment -- they're left with a discretionary income of about $5,000. That's a long way from the carefree $100,000 they have in mind.

With a little practice, Tom and Susan can start seeing their income in more realistic terms. The truth is, while they might be close to that $100,000 mark on paper, after all is said and done, they really have about $400 a month in spending money. Suddenly, dropping a hundred bucks here or $5 there becomes a bit more significant, doesn't it?

Start annualizing your spending and thinking about your take-home income in terms that reflect reality, not fantasy. Yes, it might sting a little at first, but once you get past the initial shock, you'll be more grounded in your financial reality. And the best part? You'll stop letting money slip through your fingers like sand through a sieve.

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Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, "Ask Mary." This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book "Debt-Proof Living."