Tim Clark, author of The Prosperous Peasant (my review), has a blog called Soul Shelter and he posted a guest article last week where the author’s friend Dave, a multi-millionaire from the dot-com boom, bought an espresso machine for $945. At first I reacted the same way as the author, “It must be nice to be able to afford a high-end, fully automatic espresso maker, I mused aloud.” But as the article continued, I saw the logic.
“OK, consider this: One double latte costs three dollars at a coffee shop, so your outside coffee-drinking habit comes to six dollars a day for you and your wife. That’s $2,190 per year in after-tax dollars,” Dave extrapolated. “Assuming you’re in the 27 percent tax bracket, that means you have to earn $3,000 before taxes to pay for those lattes. That’s more than a month’s wages for a substitute teacher here in the state of Oregon.”
I don’t spend $3 at a coffee shop each day but he and his wife do. I don’t spend $2,190 per year in after tax dollars on double latte’s, but he and his wife do. I don’t have to $3,000 before taxes to pay for coffee each day, but he and his wife do. For him, the $945 espresso machine makes perfect sense even after you factor in the cost of milk, beans, etc. It may not make sense for me, but for him it makes perfect sense.
This is basically the reverse of the monthly payment math trick. The monthly payment math trick is where a salesperson tricks you into paying more for something by justifying it in terms of monthly payments. If I were to argue that he’s making a bad decision, I’d be falling for the trick in reverse by focusing on the $3 a cup cost versus the $1000 espresso machine. When you do the math and find total cost, his logic is sound. You could argue that he shouldn’t be spending $3 on a double latte every day but then you’re not talking money anymore, you’re getting into personal preferences.
The bottom line is that you should always be doing the math. A commenter, Hank, said that his mantra this year is to “just do the math.” When you do the math, the answer is usually pretty clear. In this case it’s crystal clear, once you get past the $945 up-front cost. The other comments for this post are pretty good too, I think many of the commenters know each other so it makes for some lively debate.
What are your thoughts on the purchase?