How Small Monthly Bills Slowly Wreck Your Annual Budget

By Tim Lemke on 13 April 2018 0 comments

Have you ever noticed that we look at most of our expenses in terms of monthly payments? We often justify these expenses by saying, "It's just a few dollars a month." Sometimes, we even break costs down into weeks or days. But this type of thinking can be dangerous to our finances. Looking only at monthly expenses can mask the total impact of what you're spending. And when we view our expenses in isolation, we don't always see our full financial picture.

Here are some things to think about when you tell yourself, "It's just a few dollars per month."

It all adds up

When you think of your expenses as individual costs that you pay on a monthly basis, you're seeing only a very small part of your finances at any given time. Combine these monthly costs, however, and you'll see how quickly they can add up and make it hard for you to save. This is especially true with subscription-type services, in which you may pay a seemingly low monthly fee for a product or service.

Netflix is just $9.99-$11.99 per month. Your news subscription may be $7. You have subscriptions for meal planning services like Blue Apron, and clothing delivery services like StitchFix. None of these subscriptions may seem costly in and of themselves, but when you add them up, they could comprise hundreds of dollars in monthly expenses and leave you with very little left over. And because they're subscriptions, they may be automatically deducted from your checking account or credit card, so you may not even be fully aware that money is leaving or when. (See also: Are Meal Prep Subscription Boxes Worth It?)

You're being manipulated

How did we get into the habit of thinking of expenses in the context of a month or less? Because the people who seek our money want it that way. If a company can get us thinking about costs in smaller chunks, we're more likely to spend money. A gym could easily charge you $480 a year to join, but instead, they charge $40 a month and advertise that monthly amount because it seems like less. Your cellphone company could just ask for $1,200 upfront when you sign a two-year contract, but it's less scary to charge you $50 a month.

Granted, most of us would prefer to pay in monthly amounts because we may not have tons of cash on hand, but most companies don't even offer us the option to pay in bulk amounts if we want to, because they don't even want us thinking about how much they take out of our accounts each year. (See also: How Scarcity Marketing Tricks You to Spend More)

Resist the coffee analogy

Every once in a while, someone will encourage you to donate money or buy a product, arguing that it will cost you "less than a cup of coffee" each day. The suggestion is that coffee is a fairly low and everyday expense, and it's a compelling sales tactic. But the next time someone comes at you with this pitch, consider examining it in a different way.

First, ask yourself if you'd be willing to cut out your daily coffee in order to buy this new product or service. If not, then accept that your expenses will definitely rise. Second, recognize how much that cup of coffee each day actually is costing you. Maybe it's just $2 every time, but that's $10 during a workweek, $40 monthly, and nearly $500 a year. Suddenly, you realize that the "cost of a cup of coffee" isn't mere pocket change. (See also: Here's How Rich You'd Be if You Stopped Drinking Expensive Coffee)

A higher monthly payment is always a big deal

Have you ever financed a car? The goal of the car salesman is to get you comfortable with a monthly payment and ignore the total costs over time. If you're paying for the car in full with cash, there's not much a seller can do to mask the cost. But when breaking out the total into payments, the seller can convince you that a few extra dollars are no big deal.

For example, let's say you're looking to have payments of no more than $200 per month. The seller may say "Well, I can get you down to $230, which is in the ballpark. Deal?" That extra $30 may not seem like a lot. But if you have a 60-month loan, that adds up to $1,800! If you were paying for the car with cash in full, you'd never think that paying an extra $1,800 was reasonable.

Monthly payments can mask interest

If you purchase a home, you will likely have a mortgage with interest payments. You may also have interest payments if you finance a car. When this happens, the total cost of your purchase is higher, even though you don't think of it that way.

Consider that if you purchase a house with a sale price of $400,000, you may pay $2,000 per month over the course of 30 years, bringing the actual money paid to $720,000. Monthly payments can make large purchases feel more digestible and manageable, but they can also cover up the total cost of big-ticket items over time. (See also: 8 Signs You're Paying Too Much for Your Mortgage)

Consider the lifetime costs

Once, while in the process of paying some bills, I tried to calculate how much I had spent over my lifetime toward cellphone, internet, and cable TV services to one particular company. I determined that I had paid this company each month for about 18 years. The math was eye-popping. In my life, I had directed more than $30,000 to one company just so I could stay connected.

Granted, I'm not sure what I'd do without my phone or high-speed internet. But it did make me wonder whether I was always getting the best deal. Imagine if I had found a way to cut these bills by 10 percent each month. That would be $3,000 more in my pocket today! (See also: Here's How Rich You'd Be If You Stopped Driving)

We don't think of income this way

If someone asks you how much money you make, do you tell them what you take in on a weekly or monthly basis? If you are a salaried employee, probably not. Usually, we think of our income in terms of annual salary, and we rarely stop to think about how much we bring in each month, each week, or each day. Unless you're an hourly employee, you don't say "I make just $24 in an hour." You say, "I make $50,000 a year."

Think of expenses the same way. You might change your behavior as a result. "I spend $1,200 a year on cable so I can watch Portland Trail Blazers games." "I spend $940 a year on Americanos from Peet's Coffee." Yikes! (See also: 8 Ways to Get Your Morning Coffee for Free)

Saving is a long-term goal

It's important to remember that building wealth and achieving financial freedom is a very long process. It's the relatively small amount of money you save each day that piles up over time and becomes something substantial. It's very easy to be dismissive of a small weekly or monthly expense, but it's those very expenses that can make the difference between accumulating wealth or accumulating debt.

When analyzing spending, it's helpful to examine all money as potentially helpful in your quest to build wealth. One hundred dollars now, if saved, could represent much more in the future. If spent, it's gone forever. (See also: 5 Ways to Safeguard Your Financial Future With Just $200)

Take your usage into account

It's easier to defend the "it's only a few dollars a month" attitude if you regularly use the product or service in question. One could argue that a high-speed internet subscription, while costly, is worthwhile if you use it for several hours a day to run a business. But what about all those things you pay for that you never use?

Your gym membership may only be $10 a month, yet you haven't worked out in months. Netflix may seem inexpensive, but you rarely stream any movies or shows. These monthly costs can really add up, and they are made worse if you are spending money on things you never use.

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