You can save a lot of money by making simple substitutions in your everyday routine.
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Simple lifestyle changes like cooking more at home, skipping the take-out coffee and muffin on your way to work, or brown-bagging your lunch can make a big difference in your finances. The raw savings from making these choices is significant enough, but these small changes in your daily routine could potentially add up even more if you invest the savings year after year. A useful way to measure the impact of these types of simple choices is to look at the opportunity cost of choosing one course of action over another.
Opportunity cost is the benefit given up by choosing one alternative over another. In these everyday examples, the opportunity cost of choosing the more expensive alternative is the difference between the return from the option passed up (the less expensive option) and the return from the option selected (the more expensive option). The return from the option selected is zero in these cases, because the money has already been spent on that more expensive option; there is no savings left to be invested. So the opportunity cost of choosing the more expensive option would just equal the potential return from the less expensive option that was not chosen. This return can be expressed as the amount that could potentially have been earned by investing the cost savings over time.
The table below shows how switching daily or weekly routines over the long term could potentially result in very large amounts if the savings are invested and compounded over time.
- If a 25-year-old swaps bottled water for filtered tap water every day until s/he reaches 65—assuming s/he drinks 1 liter of water each day—and invests those daily savings over time for 40 years, s/he could potentially have more than $200,000 at age 65 if the investments return an average of 10% per year.
- If the 25-year-old cooks two more dinners at home every week until s/he turns 65—as opposed to eating in a restaurant on those two nights every week—and invests those weekly savings over time for 40 years at 10%, s/he would have more than $500,000 by age 65.
- If s/he usually eats in a restaurant seven days a week but switches to cooking at home and eating out only one night per week every week until age 65, the invested savings over time for 40 years at an average return of 10% per year would exceed $1.6 million!
For this to work, of course, the 25-year-old would have to actually invest the savings, i.e., the difference between what s/he could have spent on the more expensive option and what s/he actually spent on the less expensive option.
(Invest-The-Difference amounts compounded monthly for 40 years)
The point of this table is not to suggest that anybody should give up certain conveniences or pleasures all the time every day or every week for 40 straight years. There will of course be many dinners out, glasses of wine, and luscious desserts (as there should be). This table is not meant to be taken as a frugal bugle call (say that three times fast) for how to spend decades of your life. The point of the table is just to show that considering the opportunity cost of individual spending decisions can drastically change the equation.
Getting into the habit of choosing a less expensive item (if you could have otherwise “afforded” the more expensive item) can free up money that you could invest, resulting in the potential for generating significant value over the long term. In this way, the “real” cost of a particular item is not just the raw cost of that item. It can also include the opportunity cost of that item—what you might have had if you had used that same amount of money some other way.
We all have choices to make every day about how to spend our money. If our hypothetical 25-year-old reduces his/her alcohol tab by $10 every week (see table row 10)—so about 1-2 drinks with tip at many bars and restaurants in America—that would save $43.33 per month. If s/he takes the monthly savings and invests it in the market at 10% compounded earnings until his/her 65th birthday, s/he would have $274,022! Even if the savings are put into an FDIC-insured CD earning 2% per year, the total would still be $31,823 by age 65. If given the choice of having that extra 1-2 drinks per week over that entire time frame or not having that extra 1-2 drinks per week but ending up with a nest egg of more than a quarter of a million dollars by age 65, doesn’t having “just one more” seem a little bit more difficult?
Also, be sure to check out our “The $200,000 Cheeseburger” post (another Invest the Difference story).
Have you ever switched from this to that? Dive in to the Comment Stream below and share your thoughts!
Chart prices accurate as of fall of 2017. Prices may vary over time.
(1) Smoking vs. quitting smoking: see Watching Your Money Go Up In Smoke, first table, 50-state average = $187.37/month.
(2) Bottled water vs. filtered water:
- Brita 10-cup water pitcher is $29 at Target, with $3 coupon from Brita = $26.30
- Replacement filters (last 40 gals each) on Amazon are 6 for $28.29: (assume $30 with average tax) (“For best performance, change Brita pitcher replacement filter every 40 gallons or 2 months” )
- Assume 1 person drinks 1 liter/day (a little more than 4 cups/day)
- 40 gals = 151.4 liters
- 1 liter of water at Peapod = $1.09 + 7 cents tx = $1.16
- Assume keep pitcher for 10 years (amortize cost of pitcher over 10 years)
- Cost of 1 year of Brita-filtered water:
- $30/10=$3
- At 1 liter/day, need 2.4 replacement filters/year
- 1 filter is $30/6=$5.00 $5.00 x 2.4 filters/yr=$11.60/year for filters
- Total cost per year of filter each year for 10 years is $12 + $3 = $15/year for 10 years (assume cost of 1 liter of tap water/day is negligible)
- Cost of 1 year of bottled water (1 liter per day x 365 days) = $1.16 x 365=$423.40
- Net savings to use Brita filter = $423.40 – $15 = $408.40. Round down to $400/year saved for one liter per day per person = $34.03/month
(3) Buy lunch vs. bring lunch to work:
These amounts are variable, based on price of restaurant, location, items ordered, etc. For the purposes of this table, we assumed cost of buying lunch with tax for 1 person = $8.00, and we assumed bringing lunch from home for 1 person costs $3.00. These estimates are rounded and may be higher or lower than anyone’s actual amounts. Estimated savings = $5 per person per work day. Assume 240 work days/year (this assumes vacation plus holidays plus sick days average 4 weeks off = 48 work weeks/year times 5 days/week = 240 work days. Total savings = $5/day times 240 work days = $1,200/year = $100/month
(4) Buy coffee vs. bring coffee to work:
- Coffee: Starbucks 12 oz tall; $2.17 incl. tax (Chicago, IL price)
- Assume $.08/cup with tax for sugar and milk at home ($2.50 per 4 lb. bag Domino sugar and $3.50/gal. milk)
- Assume $0.51 to make 8 oz from Starbucks pound of coffee (includes cost of coffeemaker amortized, plus filters, and electricity)
- 12 oz cost at home = $.77 + $.08= $.85 cents
- $2.17-$.85 cents=$1.32 saved to make at home/day
- Assume 240 work days/year (this assumes vacation plus holidays plus sick days average 4 weeks off = 48 work weeks/year times 5 days/week = 240 work days
- 240 x $1.32 saved/day=$316.80/yr = $26.40/month
(5) Eat dinner in restaurant 1 night/week vs. cook dinner at home 1 night/week:
These amounts are variable, based on price of restaurant, location, courses ordered, etc. For the purposes of this table, we assumed cost of restaurant dinner with tax and tip for 1 person = $15, and we assumed cooking at home for 1 person costs $5/serving. These estimates are rounded and may be higher or lower than anyone’s actual amounts. Estimated savings = $10 per person per dinner. At 52 weeks/year, that comes to $520/year, which is $43.33/month to eat in restaurant one night per week instead of cooking that one night per week.
(6) Eat dinner in restaurant 2 nights/week vs. cook dinner at home 2 nights/week:
($43.33/month for once a week) times 2 = $86.66/month
(7) Eat dinner in restaurant 3 nights/week vs. cook dinner at home 3 nights/week:
($43.33/month for once a week) times 3 = $129.99/month
(8) Eat dinner in restaurant 5 nights/week vs. cook dinner at home 5 nights/week:
($43.33/month for once a week) times 5 = $216.65/month
(9) Eat dinner in restaurant 6 nights/week vs. cook dinner at home 6 nights/week:
($43.33/month for once a week) times 6 = $259.98/month
(10) Reduce alcohol consumption by $10/week:
$10/week times 52 weeks = $520/year =$43.33/month
(11) Soft drink vs. tap water at restaurant:
- Assume soft drink = $3 with tax and tip (estimate $2.50/drink plus tax and tip)
- $3 x 52 weeks = $156/year
- $156/12 mos. =$13/month
(12) No coupons vs. $4.00/week in coupons for necessities:
- $4/week x 52 weeks = $208
- $208/12 mos. = $17.33/month
