Don’t Let Small Holes Sink Your Financial Ship



“Beware of the little expenses; a small leak will sink a great ship.”
- Benjamin Franklin

A man ahead of his time, nearly 200 years ago Benjamin Franklin was preaching against habits that cost us wealth. His Poor Richard’s Almanac was chock full of financial pearls of wisdom.

None of these was more important than his warning to be watchful of the small expenses in life. These expenses quickly add up to large sums that derail our financial prosperity.

Why do we pay attention to large expenses while virtually ignoring the small things that threaten our finances?

It may well be related to how our brains process purchases.

Let me explain.

First, our brains deal very poorly with the frequency of our purchases. We easily lose track of how many times we’ve spent money.

Second, our brains are more concerned with the dollar amount of a single purchase only if the price of that item is above a certain threshold.

If an item falls below this price threshold, we tend to buy mindlessly without thinking. A $1.69 coke, $3.99 magazine, or $2 lottery ticket is purchased without much concern.

Its only when the price of an item rises above a certain threshold do alarm bells go off. At this point we’ll pay closer attention to the details, weigh the pros and cons, decide if we really need it, and in some cases put the item back.

I call this the price threshold of concern – the price at which we seriously scrutinize our purchase. This price threshold varies for different people. For some of us the threshold is $5, for others it’s $10 and for some it can be $20 or more.

These two concepts explain why we’ll mindlessly make ten separate $5 purchases in a few hours, but we’ll think twice about handing over a $50 dollar bill for a more expensive purchase.

Again, our brains become concerned with the dollar amount of a single purchase only when the price rises above a certain threshold. Combine this with the fact that we poorly track the frequency of our purchases and you see how we quickly get into trouble.

Dollar stores are great at exploiting this. During a visit to the dollar store you pick up an item and mindlessly throw it into your basket. Since it’s only a dollar it falls below your price threshold of concern.

Yet since our brains deal less effectively with the frequency of purchases you easily lose track of the number of purchases you’ve made and your shopping cart quickly fills up. By the time you reach the register you’ve spent $15, $20, $25 or more.

The McDonald’s dollar menu works on a similar principle. Each individual dollar item falls below our price threshold of concern. Yet after choosing multiple items from the dollar menu, a typical family may be shocked at the total of the final bill.

Even retailers of higher priced merchandise take advantage of this concept. Recently, I was tempted to purchase a business newspaper subscription. The offer claimed the subscription would only cost me 39 cents a day.

That 39 cents fell way below my price threshold of concern. But notice that at that moment I wasn’t paying attention to the frequency of the charge (daily).

It was only after taking out my credit card that I realized this would cost me (39 cents X 365 days) $142. I quickly put my credit card back in my wallet.

Frequent small purchases made day in and day out quickly turn into a tidal wave of expenses. Its these mindless purchases, each falling below our threshold of concern, that sink our financial ships. And because our brains pay less attention to the frequency of our purchases we fail to realize how much damage we’re doing to our finances.

A Starbucks or Dunkin Donuts coffee may cost us $2.75 each morning – a sum that falls well below most people’s price threshold. We mindlessly pay for our coffee and are on on our way.

But what if someone presented us with a bill at the beginning of the year for $1001 to cover our annual coffee habit? Many of us would reconsider our habit. Same $2.75 a day but presented in a way that screams at our price threshold of concern.

Multiply this by the hundreds of small expenses we pay each month from newspapers to vending machine snacks, to service fees, to online subscriptions, to eating out. You quickly realize that expenses that on the surface seem small, when added up cost us thousands of dollars each year.

So how do we fight back, save our hard earned money, and build a strong financial future?

Become Conscious of Your Spending

We get in trouble when we spend on items that fall below a certain price threshold of concern. Fight back by lowering your threshold. If you normally spend $5 for an item without really thinking about it, lower your threshold. Force yourself, for example, to think about the pros and cons of any purchase of $3 or more.

Determine the Annual Cost of Your Small Spending

Alternatively, add up the costs of all your small purchases so the total cost surpasses your price threshold of concern. If you mindlessly spend $1.50 on Coke at the vending machine every afternoon, determine the annual cost of this spending habit. Once you have the annual cost, in this case $390, ask yourself if the item is now worth the price.

Set a Spending Limit

Reduce your mindless spending dramatically by giving yourself a weekly spending allowance. Place $40 in an envelope for your weekly incidental spending.

Once the money is gone there is no more spending. No going to the ATM or using your credit card. You’ll quickly realize how much money you waste on vending machines, newspapers, magazines, lotto tickets and other unnoticed expenses.

Our brains pay less attention to the frequency of spending. Multiple small expenses can quickly drain our finances, especially when these expenses fall below our threshold of concern.

Put your brain in check and build a more secure financial future by paying attention to the small amounts you spend every day.

Question: What are some of the ways you control spending on small purchases?