How "sunk" are your costs?

How “sunk” are your costs?

By Gail Vaz-Oxlade on February 24, 2011
Estimated reading time: 2 minutes

Ever heard the term “sunk cost”? That’s the expense that we’ve already reconciled ourselves to so we don’t think twice about spending the money anymore.

This inattention to where our money is actually going comes from the fact that we perceive our various pots of money as having different values, and we react to them in different ways.

We perceive the money we’ve committed to our Super-de-dooper cable package as “spent” money. Yet with one call we could cut our costs in half and slam $50 a month more against our mortgage every month.

We see the money we blow on our smart phone as “sunk” money; we’ve already spent it by the time we get the bill. Never mind that a call to revamp our plan, and a commitment to using the phone only within the parameters of our plan, could save us hundreds of dollars every future month, which we could use to grow our retirement savings.

Switching banks is too much trouble. Golly, just think of all the auto-debits you’d have to change. Switching telephone providers is a major pain in the butt, even though we could reduce our long-distances charges significantly. Switching from buying new to buying used as just plain yucky.

Today, pick an expense you’ve been paying for a while – be it your gym costs, your DVD subscription, your satellite radio or your home insurance – and look for a way to reduce your costs.

It is amazing how quickly small expenses start to erode our savings potential simply because we’ve gotten used to spending the money. And it’s equally amazing how much we can accumulate in savings when we start small, consistently moving a little money away for the future.

It’s not about giving up all the good stuff. It’s about becoming conscious about how we’re spending our money, and making sure we’re also saving enough so we can have a nice life later when we’ve hung up our tool belts.