By Henry K. Hebeler


After people near retirement, they get much smarter about what things really cost. The cost is not just the price paid for the item, or even any associated interest costs. The cost is really lost savings which could have compounded into very significant numbers to help retirement -- and retirement can easily be one-third of their total life.

Let's look at some specific numbers. We'll use $1,000 as the store price of an item. Perhaps it represents some additional options on an automobile we just had to have, or it could be an addition to our computer, some furniture, skis, golf clubs, or any one of the hundreds of things where we can easily spend $1,000.

The real cost is dependent on a number of factors. The first of these is how many years you could have compounded the savings until you reach retirement. The next is whether you are purchasing for cash or credit. If on credit, you can really run up the cost with interest payments. If you have 15% interest and spread the payments over four years, you really pay $1,749 for the $1,000 store price. Many people who buy with credit cards end up with 18% interest and let the balance run for up to 10 years. That would increase the amount you pay to $5,235.

But this is still not the real cost to you. The real cost is the amount it reduced your retirement savings. If you have to reduce your deferred tax savings (or think you can't afford to start a deferred tax savings account), then you lose the initial tax deduction as well as the benefits of tax deferred growth.

The lowest cost penalty of current spending is if: you pay cash, use no credit, can take the money out of your current checking account, and have already made the maximum contributions to tax deferred savings accounts. Then if you consider the effect on retirement, if you have 30 years until retirement, and your mutual fund would return 10%, the least the $1,000 could cost you at retirement would be a reduction in your savings of $17,400. Of course if you have more or less years till retirement, the cost would be more or less accordingly. Now you're just beginning to learn why most wealthy people are penny pinchers and great savers.

Just about the worst thing you can do: The costs get significantly higher if you buy the article on credit and even more if the payments prevent you from putting more into an employer's savings plan. (We're not even going to consider the case where you fail to save enough to get the most from your employer's matching contributions. That may be the worst case.) For example, if you are 30 years away from retirement, that $1,000 purchase could reduce the amount you put in savings by $5,235 plus the tax deduction you get from making the savings contribution to a deferred tax plan. At a 15% tax rate, that's $150 lost tax savings which you are effectively financing with your credit card for a real cost of $785. Now, compound the net reduced savings of $5,235 plus $785 which equals $6,020 for 30 years at 10% and you get $105,000 loss of retirement savings.

In retrospect, wasn't most of that stuff you bought years ago just junk? Look in your basement. Look in your attic. Think about the beating you took when you tried to sell used items. Think about how fast the newness and pleasure wore off. We've all blown money on dumb purchases. But those who can recognize a dumb purchase before actually turning over the money are the ones who will have something for that last one-third of their life.

Note: For some other colorful illustrations of this theme, see Wealthmanship, 1994, Travis Lynn McFee, Wealthmanship Publishing, Inc., Salem, OR. 252 pages.