Sunday, August 16, 2015

The $27 hamburger

One of the smarter fellows I know was at one point pretty naive about money. At this period, he was having some financial trouble. He was scared to look at his bank statement, because he knew that the news was bad.

His friends went out to eat fast food a lot, but he was very conscientious about not spending a lot. He would usually just buy a single item from the fast food dollar menu, or a two dollar burger.

He asked me for some help looking over his finances. I pointed out that his bank account had gone negative. Every time he had bought something from the dollar menu, he was charged a $25 overdraft fee. I asked him if the $27 burger had been delicious. This isn't the only case where seemingly minor splurging can turn out to be very expensive. Any high interest debt (say, credit cards at 19% interest) that could have been paid down increases the cost of any splurging significantly.

Hamburger Original Price: $
Highest APR on any debt: %
If you wait five years to pay down this high interest debt, then I hope you enjoyed that hamburger. Note that I'm assuming 2% annual inflation, which actually fluctuates and has generally been lower than that.