Opportunity Cost

According to www.investopedia.com opportunity cost is defined as the benefit that is missed or given up when an investor, individual or business chooses one alternative over another.  Put another way, Peter Drucker the well-known management expert says, “everything in life is a trade-off.”  From a financial perspective, David Bach author of The Automatic Millionaire became famous for saying, “a latte a day keeps retirement away.”  He was equally criticized by many who would say that life is too short to give up their simple pleasures, but I think Mr. Bach has a point.

I was watching a YouTube video the other night about living off the grid on a sailboat.  The host of the video was describing how he was able to chase his dreams by saving a ton of money in his twenties and thirties and quitting full-time work at age 36.  He has been sailing around the world for the past 30 years.  He gave an example of saving a small amount that I hadn’t heard before.  Simply save $1.00 on every meal that you eat.  Whether you eat at home or eat out, just cut the total by $1.00 every time.  That’s $3.00 everyday which equals $90.00 per month.  Taken a step further, if you save $90.00 every month and invest in the stock market for 30 years at a historical return of 10% your total would be $187,000.00.  That’s $187,000.00 by simply planning your meals a little better, by not ordering a soft drink, by eating healthier (fruits and vegetables are cheaper) or by choosing a less expensive entrée occasionally.  This doesn’t really seem like you’re giving up much at all other than maybe a few minutes thinking each week about your meal plan.   

Think about how many things in life this could be applied to.  Not just David Bach’s latte, but it could apply to where you choose to buy gas (price), where you park (free or metered), where you shop for groceries, happy hour (less expensive drink), etc.  I’m not advocating that you need to apply all these things to your life; all you need to do is pick one or two to achieve a sizable amount of savings.  This doesn’t seem like deprivation to me and seems pretty easy to apply to everyday life.

Another potential missed opportunity cost may be where you choose to invest that savings.  Say you were to leave that $3.00 per day in a local bank savings account.  The historical return on cash is around 3% which after 30 years would yield a total of $52,000.00.  That’s a difference of $135,000.00 in lost returns just by where you choose to invest.

Getting back to the YouTube video, the host went on to say that his personal freedom was worth far more to him than having lived a slightly expanded lifestyle at the time.  Now he is living the ultimate expanded lifestyle sailing around the world with his significant other for most of his adult life.  That’s a trade-off that resonates with me. 

So, what’s your goal?  Are you missing out on your own personal opportunity costs?  Are you coasting along on automatic pilot?  Are you saving enough, or do you maybe need to consider some small changes to amp up your long-term savings?  Don’t miss out on your own life opportunities by not controlling your costs today.  Once again, it’s simple living and simple investing.

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