August 3, 2020

Opportunity Costs

We are back baby! I was pretty scared there for a minute, but everything has been all cleaned up and I’m ready to start posting again. Just goes to show how much trust is involved in things and how easy it is to break it. Needless to say there won’t be any more ads on this site for a long time, if ever after that experience. Anyway, back to the content you came here for…

There are plenty of ways to use each dollar you earn. By far the most effective one to creating wealth or achieving financial independence is to invest as many of those dollars as you can. As soon as you spend a dollar on anything else, it hurts twice. Once when you lose the dollar and a second time when it can no longer be used to make more money. A dollar invested can produce money to be spent and continue to generate money in the future.
Sure we all need to buy food, pay rent, whatever. But one of the major reasons I emphasize living on less is because those extra purchases we don’t need to make can add up quickly. By spending $20 on a t-shirt, your money disappears. Poof! Gone. If instead you decide to pass on the shirt and invest it, you can use that $20 to generate another $20. Then without even having to do anything, that $40 can turn into $80, and so on.
This effect is magnified on purchases like a car or house.
For example, buying a used car at $5,000 vs buying new for $25,000 saves you $20,000, and gives you the opportunity to invest it. With an 8% return, that $20,000 generates $1,600 every year. Let’s multiply that by 10 for a house. $50,000 (I understand this is low, just play along with me) vs $250,000. That’s $200,000 to invest and a $16,000 return every year. Starting to see how this makes a difference? After 10 years, that $200,000 grows to more than $425,000.
Rationalize big purchases especially by doing everything you can to take emotion out of it. Write down a list of the features you must have in a car or home purchase for instance. Set a range of what you’re willing to spend and don’t deviate from it. Avoid upgrades or add-ons. Use your common sense and you’ll be just fine.
Always take opportunity costs into consideration because they will never go away. Sure, stocks may decrease in value over a period of time, but in the long run you’re much more likely to come out on top. Bear markets or crashes typically provide good buying opportunities but if you feel uncomfortable buying during them don’t forget there are other options too. Take a look at real estate, bonds, commodities, or anything else that will give you a return on your money. After all, a 2% return is better than 0.

Leave a Reply

Your email address will not be published. Required fields are marked *