Hey guys! Hope all is well – I've got a GREAT guest post from Brittney Knies on something many of us never even consider when we make purchases of any size. Check it out and give her some love in the comment section! ~M$M
Ready to learn a simple mind trick that’ll save you thousands of dollars each year?
Roughly 10 years ago, I was let in on a little secret that has helped me create a significant amount of wealth during a time when most of my friends were just trying to keep their head above water. It’s a secret that has kept me out of credit card debt and allowed me to buy my own home (with a 20% down payment) at the ripe old age of 26. It’s a secret that me and many of the financially successful know about, and one I’m about to share with you. Who’s excited? First, a little background.
My high school economics teacher was one of those characters that seemed to be lifted from the pages of a book – old, semi-crotchety, with short-gray hair and huge glasses that didn’t really help her much as she had to keep her face an inch from a computer screen to read anything. (Literally. That is not an exaggeration.) However, she is one of those people that stuck with me not only because she was the first teacher to ever let us take bathroom breaks without asking permission (such freedom), but because she was the first one to tell me, “There is no such thing as a free lunch.”
I probably remember it so well because I thought she was completely batty. No free lunches? I had just had one from Wendy’s that weekend courtesy of my friend’s mom.
Seemed pretty free to me.
She went on to explain, though, that while something may be free to you, someone else was always paying for it. The lunch I got for free? Well, it cost my friend’s mom $5. The free books from the library? Your neighbors were paying to keep that afloat with their tax dollars. Everything had a cost, even if you weren’t the one footing the bill. And not only that, but everything you bought had an additional cost on top of whatever money you spent: opportunity cost.
Never heard of it before? I’m not surprised. To tell you the truth, most financially fit people probably use it on a day-to-day basis but have no idea what it’s called. You see, opportunity cost is the cost of what you’re giving up to gain something else. Kind of wordy, I know, but give me a second to explain.
Let’s say you’re given $100 from the money gods to spend as you wish, and you decide to buy a new pair of gym shoes (or you can buy them for me – I am in desperate need of new ones). The opportunity cost of those shoes is everything else you could have used that money for – repairs to your home, a nice dinner out to reconnect with your significant other, debt payoff. I catch myself doing this all the time when I get gift cards – I’m mentally calculating how I can receive the max benefit from that $100 Target card I got for “free” (A new dehumidifier I desperately need or 10 bottles of wine? Wine it is.)
Why is this so important to you? Well, to put it simply, it’s because it makes you step back and see how idiotic your spending decisions can be (sorry so harsh). According to an article in The Wall Street Journal, the average student loan debt for a 2015 graduate is $35,000, which means that when you use a few hundred dollars to buy a new TV or restock your closet, you are missing out on the opportunity to use that cash to pay back debt and save interest. Or invest for retirement. Or put towards your child’s college fund.
For instance, let’s assume you were one of the lucky ones and received a $2,000 tax refund this year. You decide to use that to go on a “parents-only” vacation to Napa Valley in the fall. (Sounds like fun – count me in.) However, let’s also assume you still have $10,000 in student loan debt with a 5 year loan period left. At a 4.5% interest rate, using that $2,000 could save you almost $450 in interest and shorten your payback period by 13 months. Or as another option, you could use it to fund a college savings account for those children you’re so desperate to escape for a few days. I’m not saying the vacation is the wrong choice. I’m saying that you need to factor in all of your options and decide which one takes priority in your life. That’s what opportunity cost does for you.
This not only applies to how you spend your money but also how you spend your time. Take your typical Saturday morning for instance. You could choose to catch up on some sleep and not leave bed until 10:30am (obviously not a choice for those with small children…sorry). Or you could make up for those missed workouts earlier in the week and catch an early morning spin class. Or you could call your parents who you don’t see often and go grab breakfast. None of these are bad ways to spend your time – again, it’s you deciding what takes priority.
There have been many time when I’ve had extra cash and wanted to throw it at Nordstrom’s or Best Buy (iPad, come at me). Or when I’ve almost succumbed to the Jones’ and said adios to my 8 year-old G6 and went car shopping (read why I didn’t here >>> Why I Still Drive My Piece of Crap Car); however, when I factored in the opportunity cost of what else that money could go towards, it has stopped me from actually going through with that impulse buy. When I was in my early 20s, saving for a house took precedence. Now, saving for a kitchen remodel (and that new car) is a bigger priority than having a new pair of shoes I would wear maybe once a month. I can’t tell you how much the concept of opportunity cost has saved me, but I know without my high school economics teacher cluing me into it, I wouldn’t have the financial stability I enjoy now. And FYI – it’s wonderful.
Implementing opportunity cost isn’t difficult, and it’s a concept you should think about almost on a daily basis. The next time you’re at the mall about to make a purchase, ask yourself “What else could I be doing with this money?” Or when you feel like you haven’t seen your family all week and yet someone asks you to help them at a charity auction on Saturday, ask “What is the best way I could be spending those 6 hours?” It’s a simple mind trick, but it will allow you to make what you think your priorities are your actual priorities.
Now it’s time for you to share: What difficult choices have you had to make with your money or time?
Brittney is a 29 year-old CPA who works as a financial analyst in Indianapolis. In her spare time, she runs the blog Britt & the Benjamins, which is focused on helping people, especially women, achieve financial independence and kill it in their careers. Check it out for more financial tips, tricks, and wisdom!