The $500 Question


Hmm, what will I wear today? What will I make for breakfast? Should I wake my daughter up now or after I make coffee?

Our days begin with a whole series of little questions, and we usually form them hastily without a lot of thought on the long-term outcome of the answers we choose.

Similarly, when we’re making financial decisions, it’s hard to know how something we choose or don’t choose today will impact our lives next year, in five years or in 10 years. So allow me to add some perspective.

Let’s say I make a friend at work and we hit it off. We start going out for a quick coffee break on Tuesdays and Thursdays. I take my new friend to this cute cafe down the street from our office that sells these amazing red velvet cupcakes. My friend ends up loving them even more than I do, so we make it a regular date. Every Tuesday, every Thursday, around 2:30PM, when we start feeling sluggish, we head out together for a sweet treat and a fun chat.

Now, let’s say that I don’t change my exercise routine or my eating habits. The only addition to my daily routine is this teeny, tiny cupcake twice a week. Well, it turns out that after a year of this, I weigh 15 pounds more than I did before! Huh? 15 lbs? How is that possible? They’re just little cupcakes! Was the cupcake just a disguised fat bandit? Not really. The cupcake was just a cupcake. It was the habit: the regular pattern of behavior that repeated week after week, rotely consistent over a long stretch of time.

Recently, I was looking for a way to show how the choice between a $2,500/month rent versus a $3,000/month rent would impact a couple over their lifetime. In San Francisco rents are very high so it’s easy for a couple to want to make that leap to a nicer, roomier place for just $500 a month more…right?

But that $500 question resulted in a $1,500,000 answer.

That’s how much the couple would have saved over a lifetime if they had made the $2500 choice instead of the $3,000 choice in their late 30’s (with rents increasing regularly over time and the savings between the rental values compounded through investing). To them, that actually was the divide between being able to retire in their early sixties and needing to work past 70. They had NO idea that the $500 question would lead to such a huge shortage in their financial future.

So, the next time you face what feels like a small money question, make sure you’ll be happy with what that might look like if stretched out over a long period of time. The cupcake habit cost 15 lbs. The rent habit cost $1,500,000. That’s one serious $500 question!

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