Financial Priorities: Opportunity Cost of Money
Daily Origami is a way for us to record our off the cuff thoughts, feelings and observations about the world around us. Published every weekday, Monday through Friday.
The original post scheduled to go out today was much longer than this one. It was an annoying, preachy post about mindless consumerism and how our economy is being propped up by misplaced desire disguised as rational thinking.
But seeing as it’s the end of the week, I’ll spare you my sanctimony and just leave you with the framework that Jennie and I use to make purchases.
This framework rests on one simple premise:
Every economic decision has A human cost thaT's greater than the price tag.
Next, we ask ourselves the following questions:
1. Are we getting more out of this than we’re putting in?
In other words, is it worth it? Is the value we get greater than the price we pay?
2. Are we willing to bear the true cost of this decision?
The price doesn’t measure what something truly costs. The true cost is the value of the next best alternative. Since every dollar spent is a dollar not invested, the cost is the future value of that dollar over our working lifetime.
The Math (showing my work):
- 5% return over 35 years: 1.05^35 = 5.51
- 7% return over 35 years: 1.07^35 = 10.67
Over the next 35 years, $1 invested will be worth anywhere between $5-10 upon retirement. I used the most conservative assumption of 5-7% compounded annual returns (and rounded down).
In other words, when the average American family spends $1,700 on clothing and $1,000 on the latest gadget, that’s the equivalent of shaving anywhere between $13,000 to $27,000 off their lifetime net worth - every year.
And this is how I know that youth is wasted on the young.
At a time when the potential rewards of making good financial decisions couldn’t be higher, we’re the least equipped to take advantage of them.