Luxury is Seizing Opportunity Costs

Imagine you are walking through in a store. You pick up a pretty item of decor and notice the price is sixty dollars. Before you toss it in the cart with a shrug, ask yourself this:

• Would you pay one and a half or even three times that amount for the item?

• What about twenty-five times the sticker price? Maybe not?

• If it is a recurring expenditure, how would you like to pay three hundred times the current price? `

If you invested the money instead of making the purchase, you could double or even triple your original seed money in about ten years.  If that seems like a long time horizon, tell me, what is so urgent about having that thing right now? Will it actually make your life materially better? Probably not but it will momentarily assuage your discomfort and emotional turmoil, and look great on the couch, right?

Ok. Let's step back and ask a new question, is buying this thing right now better than creating options in the future? Once the money is spent, you cannot get it back.

In the case of our decor, we could start with sixty dollars invested over ten years and easily end up with between one hundred fifty and two hundred dollars in the future. That amount of money translates into either more decor or higher quality decor but the time scale is not right. That is not enough gratification for such a long delay. If you make such purchases regularly, and this article convinces you to forego them and invest instead, you reap the benefit of compound interest and aggregation. To make the numbers nice and round, let's say you spend an average of three hundred dollars per year on decor. Investing that amount over ten years gives you one hundred and sixty percent of your original investment at ten percent.

Leaving an empty space also creates options and space for creativity. You could repurpose an item you already own. Maybe, like an archeologist, unearth something stored in the basement or found at a garage sale. Or, you could create your own seasonal decor with flowers from the garden, or natural items. You will have room when grandma or your mother take on Swedish death cleaning and offer you their old decor. This is especially poignant if the heirloom is associated with fond memories.

Perhaps you wait, create a plan, save up and then redecorate your whole living room in one fell swoop. Always bearing in mind that a good plan does not rely on any one individual or item. Quality is timeless. There is no such thing as 'the perfect rug' or couch or whatever. A large variety of items will always be available in all shapes, sizes and styles and at multiple price points. Increase the space between impulse and satisfaction. That is where grace lives. Maybe in the end you decide to leave the couch or shelf blank and spend the money on a vacation instead.

Back to your regularly scheduled Latte Factor

Aggregating small expenses helps us understand the full impact of the purchase. If you buy coffee at a cafe every day, let's say it is five dollars per cup, and you work a regular schedule so forty-eight weeks per year; that adds up to twelve hundred dollars in a single year. I know we can't just quit caffeine cold turkey so, if you save half by making it at home, that leaves six hundred dollars per year to invest. In twenty years, you will have three times the amount you invested. Aggregating that pocket money and continuing the investment for another twenty years will bring you up alongside one thousand percent of your invested money. That is, you will have ten times the amount of money you invested!

Looking at it through the lens of the four percent rule, we can examine the a different aspect of opportunity cost. If we were to use the money our wealth generated to buy a cup of coffee every work day, it would require one hundred dollars a month. Thus, we would need thirty thousand invested. The absurdity of using stored wealth to fund a workday habit is not lost on me. However, over the course of ten years, one could spend upwards of twelve thousand dollars on coffee alone. That is the real absurdity. Splitting that expense in half by making it at home, it would take about fifteen years to earn and invest enough money to create a perpetual coffee fund ($18K).

Of course, you can't take it with you...and as things like this tend to go, it isn't likely that you will invest the money anyway. You could fritter it away on something else and so might as well buy the decor because it makes you smile right now. I don't pretend to dictate your spending priorities but I do ask you to consider the financial opportunity cost of shopping for clothes, subscriptions, takeout and eating away from home, and the strange American ritual of Target runs. The Latte Factor illustrates that if we can reduce those unnecessary expenditures by half, it only takes fifteen years to fund that habit indefinitely. That is, at the 50% reduction in expenditure and assuming you invested the other half, the money you did not spend.

The Real Opportunity Costs

Certainly, the opportunity cost of outsourcing things you could do yourself manifests in our bank accounts. It also manifests internally as a lack of self-restraint, patience, planning, and practical skills resulting in decreased self-satisfaction. If one has enough money and presence of mind, there is nothing that cannot be solved with a phone call and a credit card. However, there aren't many of us who can afford a maid or valet to tie our shoes and apply our oxygen mask.

Many have been inculcated to equate wealth with spending, but with every fortune comes generations of productivity, resources accumulation, discipline and business acumen they don't see behind the curtain. If money is a flow, wealth is built in pools, not by allowing continual leaks to drain away resources and not by blasting every problem with a waterfall of cash.

Prudence and planning can save twenty to thirty percent. If you need something, buy the lowest cost item that satisfies your needs. If you want something, note it down and wait until it goes on sale. Outside of the rap game, nobody ever bragged about paying full price and impressed the people around them. Every retailer has sales, even if it is only once annually. Shop second-hand. This used to give me the ick but now I realize that everyone has overwhelmed themselves with accumulation. Many of the items are rarely or never worn before they are listed for sale. You can always take the to the cleaners or hang them up outside to remove the etheric body of the person who wore it before you.

Self-restraint reigns in the impulse to satisfy the immediate desire and teaches us not to equate happiness or self-worth with material goods. It also trains us to maintain equilibrium in challenging situations by considering our thoughts and actions. Maintaining a calm nervous system aids self-restraint immensely. It allows us the space for assessment and reflection about the step we are about to take. It allows us to choose 'of our own free will' instead of based on our pre-existing patterns and default responses from a chaotic nervous system in panic mode. Discipline creates satisfaction because it allows our actions to align with our aspirations and goals.

One might look back on a lifetime of patience and self-growth and smile but it is the practical skills, also built over time, that lead to the most satisfaction and continue to enrich our lives as long as we have them. Competency begins when we skip the default credit card swipe. We can then ask ourselves what the next best step is and move forward from there, illuminating the unknown, bringing it to light and making it known. Sure it may take longer than hiring a professional and you may even make things worse along the way before the issue is finally resolved, but you will have gained experience and knowledge about what works and what does not. At that point, you will never have to pay someone to do the thing you just learned how to do yourself. Even if I do all the work myself, I find it reassuring to have someone else there, a friend or partner, for moral support.

Financially, foregoing unnecessary purchases and investing the money instead is always a win for your future. More importantly, reducing ones reliance on unnecessary purchases and committing to a recurring investment plan takes the cake as far as creating options for your future. Planning, prudence and self-discipline are necessary skills for life and applying them to your finances hones the mind to accomplish the ultimate confidence boost of self-reliance and mastery.