Peter Boys, Boys Financial Services

Understanding Spending Trade-Offs

Save Vs Spend1
Opportunity lost

When you buy something, do you ever think about the lost future opportunity that this purchase has cost you?  We usually just save what’s left over, if any.  But it’s important in understanding spending trade-offs — by spending a little now, we limit our ability to purchase or invest in better things in the future.  By controlling our spending, we can then maximize the return on money left over into suitable investments.  Develop a habit of paying ourselves instead of spending ourselves first!

For most of us, rationalizing the consequences of buying now to our future purchasing value is overwhelming.  It’s hard for us to comprehend the real cost of opportunities lost when we purchase things.  Simply put, we rarely say, “If I buy a Starbucks coffee today, what will I NOT be able to buy tomorrow?”

What IS the trade-off?  

A study was recently conducted with people on the verge of buying a new car to determine their ability to assess the opportunity cost of that purchase.  Over 90% couldn’t answer the question “If you buy this new car today, what won’t you be able to buy in the future as a result?”

When pressed, the majority responded, “If we buy this new car today, we won’t be able to buy another one tomorrow.”  But no one said “we won’t be able to buy 300 lunches at a restaurant,” or “we will have to give up seven family vacations.”  It's difficult to compare the value of money across categories or time.

If you have an iPhone, you can download an app called Oranges2Apples to instantly find out the opportunity cost of your purchases.  You enter in the amount you would use to buy something and it will tell you what else you could buy for that amount.

Very few purchases today are with cash

Because we don’t count bills over the counter for most of the purchases we make, we’re disconnected from our spending, as using a card doesn’t have the same impact.  If you were given $1,000 cash in an envelope to spend each week, you would be much more aware that the cash you are spending comes at the expense of other things you may want.  Credit and debit cards, loans and mortgages, can isolate us from our money, making it difficult to compare the value of spending now with the value of money in the future.  Financial institutions and retailers like it this way, as easy credit encourages people to take on more debt, pay more interest, resulting in bigger profits for stockholders.

A financial advisor can help you better recognize your spending decisions and habits and encourage you to think about the opportunity costs of everyday purchases in relation to their investments.  They can help you understand that 30 coffees purchased a month may equate to $1,000 per year in future retirement income.  Or that each $40 dinner out equals 2% of a $2000 vacation.  And in the long run, saving more will probably have a much greater impact on your financial security than rate of return.

It’s also a good idea to consult your financial advisor on big spending decisions.  A large house on a nice acreage sounds nice, but it’s easy to overlook all the costs associated with that – commuting, higher utilities, insurance, maintenance, renovations, or new furniture.  Think about what you are willing to give up now and in the future in order to make that stretch.

It’s easy to feel like we are entitled to have it all, but most of us can’t.  Your advisor can help you sort it all out.


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