I once owned an SUV worth $1 million. No, really, I did.
I was in my 20s. Young and, well, stupid. I was showing off my success, and my status symbol of choice was a Ford Expedition. Like others my age, I was caught up in keeping up with the Joneses, so I signed on the dotted line, got the bank to loan me the money, and began to make payments. That one decision cost me $1 million. I know, no Ford should cost that much money. But it did—and here’s why.
I made $600 car payments every month for five years to own that hunk of metal. If I had invested that money in my 20s instead of driving it around, I’d have over $1 million at age 65.
That’s a classic example of opportunity cost.
Working Definition of Opportunity Cost
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Opportunity cost is a fancy financial term that basically means this: If you spend money on this, then you can’t spend it on that. If you spend $10 on a book, you can’t spend that same $10 on lunch. Money spent on clothes can’t go toward your grocery bill. Every choice has consequences. You always give up something. Resources like time and money are limited. The problem is that most people don’t think through what a choice may cost, both in money and in time lost.
Take my example of buying an SUV. Not only did I lose out on the money I could have earned by investing, but I also lost time—five years of saving up for retirement. And when it comes to investing, time is your best friend (or your worst enemy).
Why We Don’t Think About Opportunity Cost
Let’s face it. Most of the time, we don’t stop to think about the opportunity cost of a purchase. We just open our wallets and fork over our money—or a credit card. We don’t stop to consider the impact of our spending. But why is that?
- We live in an instant society. Who wants to save money until you have enough to buy something? Just whip out that credit card and take your purchase home today! You’ll also take home the interest. And every time you pay interest, you’re robbing your retirement savings.
- We buy on emotion. Fear, anxiety, jealousy, anger, sadness—those are not-so-fun emotions. To feel better, we spend money. Here’s the problem, though: When you spend money carelessly, you’re adding another emotion—guilt.
- We get sucked into social pressure. If somebody else has a new boat, then we need a new boat. Keeping up with the Joneses meets FOMO—fear of missing out. We picture others having fun and we want that too. We forget that the Joneses are up to their eyeballs in debt.
- We get duped by marketing. For example, store owners might place a $200 jacket right next to a $75 jacket. That’s so we think we’re getting a bargain at $75, without ever thinking of what we are giving up by buying the cheaper jacket. That $75 left alone in an investment for 40 years adds up to almost $3,400. That may not seem like much, until we think about how many times we give in to those “bargains.”
The Biggest Reason We Don’t Count the Cost
I’m going to be honest with you now, so hang on. The biggest reason most of us don’t take the time to look at the opportunity cost is simple: We don’t want to. We don’t want to be responsible and accountable for our actions. If we look at the downside of our purchase, we might not get what we want—when we want it.
Time to Get Focused!
Opportunity cost can be summed up pretty easily: You can’t have your cake and eat it too. You can’t spend like you want now and expect to enjoy the retirement of your dreams later. It’s time to get focused on the future. If you haven’t already discovered your Retire Inspired Quotient, that’s the place to start. That way you know how much money you’ll need to enjoy the retirement you want.
If you take action now, you’ll get to enjoy an amazing retirement later. If you don’t, you’ll learn firsthand the cost of that missed opportunity.