When it comes to spending money, I tend to categorize my spending into two groups, regardless of the actual amount in question:
1) One-off costs
2) Recurring costs (A year or more)
One off costs are straightforward since I spend only what I have. It could be a $25,000 premium for an investment linked account, a $5,000 holiday or a $1,500 computer. I only have to evaluate the value of making the purchase and confirm whether the money is physically available and not earmarked for other things.
However, I have a huge resistance to recurring costs. The surest way for a salesperson to put me off a purchase is to mention the words “per month”. It could just be a few dollars a month, and bring untold benefits, but as long as it necessitates me adding a line item to my budget for an extended period of time, I will agonise over the decision for months on end.
For example, I have wanted an iPad 2 3G version for some time. If it had just the $800 upfront to get it, I’ll have been in the Apple store a few months ago. I have not spent the money because of the thought of having a recurring $40 data plan in my budget. I have also been thinking about getting my own domain for the blog. The benefits are clear but I have been hesitating because it would mean another $20 line item in my budget.
Why I try to avoid recurring costs:
1) Recurring costs are easy to add. This is especially true of small amounts because the immediate impact of adding them feels minimal. “Oh, it’s only $5 a month; I’ll just save $5 less.” But things can and do add up.
2) Recurring costs are hard to axe, again especially true of smaller amounts, because the immediate impact of cutting them out will hardly be felt.
3) Recurring costs tend to disappear from the consciousness. This is doubly the case when these bills are paid automatically.
4) I am targeting early retirement. In retirement, costs are going to be paid for by investment income. Assuming a draw down rate of 4%, a $10 monthly subscription will require a $2,500 investment to fund it. The more I can prevent these costs from creeping into my budget, the less I have to save and invest and the earlier I can retire. Personally, I don’t foresee a good chance of getting them out of the retirement budget once I get used to them (see point 6 below).
5) My income is stable for now, but it may not always be. I could get sick, laid off. Maybe I want to pursue a freelance career. In this sense, recurring costs can feel like credit card purchases. The spending is normally already committed before the income is solidly in the pocket.
6) The above points become much less important if I feel I would be able to cut these costs out of my life painlessly at a later stage. However, recurring costs allow time for these costs to become habit, which then continues to become an essential. Cutting essentials are a pain in the butt, so why put myself through the pain of cutting it later when I can prevent it from rooting in my life now?
In my aversion to recurring costs and resist adding additional lines to my budget, I have unconsciously redefined my needs and wants. When I consider that a committing to a service may mean that the costs stay with me until the end of time, it becomes easier to determine if I really need or even want it in the first place.
Are you as resistance to incurring recurring payments as I am? Or do you belong to the super willpower group and can cut it whenever you need to?