Have you ever heard of the term Opportunity Costs? Believe it or not, it is a concept that can affect our everyday decisions about spending money: if it currently doesn’t affect yours, it should. At its core the concept of opportunity costs is simple: it’s the idea that the money you spend on one thing today will not be available to spend on another thing tomorrow, or in the future.
Put even more simply, Opportunity Costs is about making a choice between one purchase or another, or none at all. Learning to use the logic behind opportunity costs can help you control spending and allow you to feel better about what you spend your money on.
The Opportunity Costs of Car Ownership
In the book Dollars and Sense, Dan Ariely and Jeff Kreisler describe an experiment: Dan and a research assistant went to a Toyota dealership and asked people what they would give up if they purchased a new car. Almost no one had an answer. They were spending tens of thousands of dollars and never considered what else they could spend that money on, or what they would have to give up to spend that money.
Borrowing money to purchase a car makes the opportunity costs seem lower, but imagine if you were paying for a car in cash: would you still spend as much as you would if you were borrowing the money?
Consider this: for vehicles driven 15,000 miles a year it costs, on average, about $8469 to drive and maintain a new car. This includes loan payments, insurance, gas, maintenance, tabs, etc. That’s $706 each and every month. Now ask yourself, what could you do with $706 if it weren’t going towards owning and operating a vehicle?
“Don’t give up what you want most for what you want now”Dollars and Sense
Small Opportunity Costs Add Up
If you read my blog about my new year’s goals you would know that in 2018 my husband and I spent enough money on dining out, take out, and alcohol that we could have funded one of our dream trips to either Spain or the United Kingdom.
We spent our money on what we wanted in the moment and never considered that it was forcing us to give up what we wanted most! We decided to cut our spending in half so we could take our dream trip in two years. Stay tuned for an update on that plan in the next couple weeks.
This concept works with small purchases as well. Think about something you spend money on that doesn’t seem like a big deal. It could be anything for you, but I will use fancy coffee for my example. If I spend $5.00 once a week at a coffee shop what am I giving up? I no longer have that $5.00 to spend on something else like a cheap movie ticket or a glass of wine at happy hour. Over a year I am giving up the opportunity to spend $260 on something else that I might enjoy much more. Since I can’t name what that something else might be (a new phone, a pair of nice leather boots, a new winter jacket, you name it) it doesn’t feel like I am losing anything, but I am.
Making a Change
So how can you change this? Here are some strategies I am trying – these strategies also work great for time management!
Be mindful of opportunity costs
If every choice I make to purchase something (or spend time doing something) means there is something else I won’t be able to purchase (or spend time doing) I want to make good decisions about what I am purchasing (or doing). I am challenging myself to simply ask, “What am I giving up if I spend this money now?” At times it will be impossible to know. But if I know what I really want I can also ask myself “Will this purchase move me towards or away from what I really want?”
In order to answer the questions above I need to know what it is I really want which means I need to set goals. If I do this I am hoping I will have more of a reason to say no when temptation (not opportunity) comes knocking!
Plan ahead how I will spend money
Have you ever found yourself at the end of the month with little to no money left over and regretting purchases you made earlier in the month? You think to yourself, “If only I hadn’t spent all that money going out to eat” (or whatever exciting thing you had to have at that moment). That is opportunity costs catching up with you. It happens to me all the time. I am committing now to make a plan for my “fun money” so I can spend it on what I really want, not just what I want in the moment.
To learn more about opportunity costs check out the book Dollars and Sense. Remember – it’s free to do from the library, but you will be giving up some time!
To get some help setting goals and making a plan for how you will spend your money make an appointment with an LSS Financial Counselor today by calling 888.577.2227 or visiting our website.
Author Shannon Doyle is a certified LSS Financial Counselor.