How Small Costs Add Up

One of the ten nasty money habits posted on AllThingsFinancial was “failing to see how little purchases add up”, which gives the following formula for showing how much an amount spent now could be worth in the future, if invested:

P x (1 + ROR)N

  • P: Price of good or service you want now.
  • ROR: Rate of return – the expected return from your investment, expressed as a decimal.
  • N: number of years the money would stay invested (for example, until your retirement).

If you apply this formula to something that costs £210, for example, over a period of 30 years, then the £210 spent now could be worth £907 in 30 years time. Of course, inflation will erode the true value of this amount, but it highlights how it’s worth considering whether the money you may be spending on luxury items (such as the XBox 360 I linked to above) would be better off being invested instead.

As this calculation is a little complex, it makes sense to add it to the money saving calculator, which I’ll aim to do when I get chance.

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