Earlier today, I linked to an article at Free Money Finance that included a quote from Mary Hunt:
Get into the habit of quickly calculating the annualized cost of things and you’ll achieve an effective way to get mindless spending under control.
After reading this, a reader wrote in to me and said:
I can see how a tip like that could be useful, but I’m really awful at mental math and it seems unreasonable to futz around with a calcluator to do the math. How do you do this kind of math?
First of all, I’ll admit that I’m good at mental math. It was something I practiced a lot when I was very young and I can still do things like add a series of numbers or multiply two multi-digit numbers in my head. Thus, I usually do the math in a strange fashion in my head that really is hard to explain or make rational to others.
Instead, I asked a few people on Facebook and Twitter how they did this kind of math and they all responded with more or less the same technique.
First, they figured up how much a week of such purchases costs. If you do this thing once a week, it’s easy. If you do it more than once, double it or triple it – whatever’s appropriate. If you’re unsure about the pennies, round to the nearest dollar. So, if you get a coffee and a bagel for $5.46 three times a week, round the amount to the nearest dollar (down to $5) and multiply that amount by three, giving you $15.
Next, add two zeros on the end. That’s easy enough. If your current amount is $15, your new number is $1,500.
Finally, divide that number in half. If you can’t do it quickly, feel free to adjust the number from the second step. So, for example, if you have a hard time dividing $1,500 in half (it’s $750), just add $1 to the original $15 and divide that resulting number in half – $1,600 divided in half is $800. I suggest adjusting up if you rounded down in step one or adjusting down if you rounded up in step one.
That’s it – you have a very quick thumbnail of how much this expense costs you over the course of a year.
What if the expense is monthly? Slap a zero on the end and you’re getting close, but it’s a bit higher than that, too.
The thing to keep in mind is that this is a rough estimation, just to let you know the approximate amount you’ll be spending on this routine if you keep it up. Being able to come up with a rough estimate quickly is key. This way, you can do the math in your head while standing in line, giving you time to rethink the whole thing.
What’s the real benefit for doing this? If you do this type of calculation, you can quickly put your impulse spending in context. $750 a year spent on bagels and coffee could be half of an extra house payment. Paying off the house sooner makes it easier and more attainable for you to jump into the career you’ve been dreaming of for years. It might also open the door to having a child sooner than you think.
If you decide to go ahead with the purchase after doing this calculation and weighing the options, that’s great – you’ve weighed the options and chosen the option that provides the most value to you. However, denying yourself that opportunity often puts a big restriction on your big dreams.
Yep, a bit of mental math can make all the difference.