What would you give up now to get something better later?
When we let our emotions drive our financial decisions, we can miss out on opportunities that are more valuable in the future.
Sometimes we hear people say that they cannot afford expensive items. However, they still purchase anyway by paying for it over time, which in turn costs more in the long run.
Foregoing a benefit now for an alternative choice is called an opportunity cost in the world of economics.
An example of this in the corporate world could be a marketing department holding off funds for sponsorships to instead gear up for a major advertising campaign.
In households, a family can decide to give up the convenience of prepared food or eating out to instead go on a grand family vacation later.
What are you willing to give up now in order to get something better later?
In the movie “Paycheck” starring Ben Affleck, he gave up a $92 million payday for a bigger one. After seeing his future in a time machine, he made the decision to forego a large payday for an even higher one, the winning numbers for a big lottery payout.
This may only be a movie, but he still took the opportunity.
The same decision can be made in everyday life with simple steps like not moving to new apartments or homes every few years.
Moving expenses can add up with apartment hopping, especially when those funds could be used to purchase your dream home.
If your home already has equity, let it continue to build and help with long-term expenses like your retirement or your children’s college education. Upgrading to a larger home also comes with higher expenses.
Also, do not be too quick to get a new car after the loan has been paid in full or trade-in every few years for a new one. This action will result in you never being able to save monthly car payments for emergencies.
Here are a couple of other tips that you can try for at least a month that can help you make a great “opportunity cost” decision:
(1) Pay cash for every purchase. Using credit cards cost more because of interest rates and debit cards have their own downside as you run the risk of spending funds that belong to another bill.
(2) Do it yourself. You can skip the nail salon for at least 1 trip a month, wash your own car a few times over the summer, and hand-wash a few dry clean only items (especially blouses or shirts) to cut down on costs.
When you add up these savings, you can potentially end up with an extra $70 a month. This may not seem like a huge amount monthly, but $70 multiplied by 12 equals $840.
An extra $840 a year is worth the opportunity cost of eating out, trading up, and sometimes convenience. What will be your decision?