Fuzzy Math – How Much Money Are You Actually Spending?

In order to get serious about financial independence, we need to first understand how the numbers work.  The problem is that the world is not set up to help us think through the numbers accurately.  In fact, we are set up to overestimate how much we make, and underestimate how much we spend.  With the deck stacked that way, it is no wonder that the path to financial independence seems so steep.

The last post discussed the income side of the equation: are we really making what we think we are making?

This post addresses the spending side.

Dining out

A common solve to this would be to create a budget.  Some people enjoy this process, but I can understand how this might not be for everyone.  But even if you have created a detailed budget, it’s not always the most practical tool for day-to-day decision making.  Suppose a friend were to ask whether you would like to go grab dinner later in the week, you probably aren’t going to ask for a moment while you determine how your dining spend is tracking to plan that month.  What you need is a convenient mental model to estimate what something like that will cost you.

If we continue this example, let’s say we decide to patronize a nearby steakhouse, a fine establishment.  After settling down and perusing the menu, we might notice that a ribeye is listed for $50.  (Hopefully, you are already in the habit of noticing prices on the menu before ordering).  You might think to yourself that is not so bad.  It will end up being $50 plus a little bit extra for tax and tip.

But it’s those little extras that always seem to add up to an astonishing amount.  With ~9% sales tax and ~15%-20% for tip, we are already 25% to 30% above the list price.  Throw in a bottle or two of wine, some appetizers and sides for the table, maybe split a dessert, which will all include the 25% to 30% tax and tip surcharge, and the final tally can easily end up being twice what you had expected:

Total$50+$75 to $100+
Ribeye steak$50$50
Service charge?$10
Extras (sides, apps, wine)?$10 to $30
Tax and service on extras?$3 to $9

That eating out costs a lot might not be a surprise, and many of you are probably already aware that you are paying for these extra costs.  You may even be vigilant for the cost of extras that are inserted into the group bill.  Even with this awareness, however, how often do we look at the menu prices and accurately gauge what the final damage will actually be?  And when we are wrong, how often is the surprise more than what we thought, rather than less?  It’s just not something that you would normally think about while out to dinner, nor are these topics of discussion among most social circles.  Restaurants and businesses generally certainly do not make it easy for you to know or calculate the fully loaded cost.  There simply isn’t any motivation for them to help you understand that you are really going to be spending upwards of 30% above prices they’ve listed.  It’s our responsibility to remain cognizant of the real price.

As an aside, steak was one of the first meals I learned to cook, and one of the primary motivations for cooking was the cost difference between eating out and eating at home.  It’s remarkably easy to reproduce near-restaurant quality for steak at home.  Many years and meals later, I rarely would consider ordering a steak at a restaurant.

Big purchases

To take another example, suppose that we are on the market for a new kitchen appliance – a new refrigerator perhaps.  During our research, we might read some reviews that indicate the list price for such an item is $1,000.

Once again, sales tax is a hefty component of your fully-loaded cost, unless you happen to live in one of the few states that doesn’t have a sales tax.  However, in making this purchase decision, are we also considering all of the other costs to get the new refrigerator up and running: the delivery home, the installation and other parts that might be required for installation, the disposal of the old unit, etc.?  If we purchase online rather than in a store, are we considering the potential hassle of having to return the unit?  How often do these extra costs wind up being a significant chunk of the total cost?

Businesses are motivated to anchor you to the initial purchase price of the main item and to obscure the total costs of ownership.  They may be perfectly willing to use the headline item as a loss leader in order to upsell more profitable ancillary services later on.  This is a logical razor-and-cartridges business practice that shows up in many different categories: financing and insurance, maintenance and repairs, extended warranties, installation, etc.  Once again, it’s our responsibility to think through the total cost of ownership throughout the lifetime of the item.

Housing costs

This is likely the biggest expense category for most of us.  And it may be even bigger than we think it is.

Given how obsessed Silicon Valley is about real estate, I’m going to skip most of the common ancillary expenses here.  There are plenty of additional financial costs to housing that are covered in greater detail elsewhere, whether its the nasty shock of that first property tax bill, the necessary cost of insurance, or the ongoing expenses around utilities and deferred maintenance.  There are plenty of primers on how to compare the cost of owning versus the cost of renting.  What I want to focus on are the non-financial costs to housing:

  • Distance.  How much time is spent commuting to and from work?  How would you be spending that time if you didn’t have to commute?  How much would you pay to have that time available to you?
  • Size. How much time is spent on cleaning, yard work and other chores?  How much time is spent on furnishing and decorating extra rooms?  Is that how you would prefer to spend your free time?
  • Opportunity.  How would you value the flexibility to be able to move somewhere else to pursue a new job opportunity on short notice?
  • Peace of Mind.  There is a ton of pressure that accompanies most housing decisions.  It may be coming to grips with the huge financial commitment this entails.  It may be the relief that follows a move after a long period of fruitless searching.  There is a cost to bearing this pressure, and it’s not always reflected in the direct financial costs.


This post has meandered a bit, but my goal was to highlight that we need to be mindful of all of the costs (financial and non-financial) of our spending.  To boil it down to the key points:

  1. Consider the fully loaded costs.
  2. Consider the non-financial costs.

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