Nearly every day in our lives we experience trade-offs and make choices affecting whether or not we’ll do something, buy something or do nothing and buy nothing. Some of us will choose to walk rather than drive, some will choose to pack a lunch rather than dine out, some of us will choose to save money while others will choose to spend it.
These trade-offs are what can be referred to as opportunity costs; meaning what we’re giving up in order to take advantage of another availability opportunity.
Financially, we make the choices all the time; the choice to dine out versus saving the extra money towards retirement; the choice to not save in our employer’s retirement plan so we can have more money to spend today. These opportunity costs can add up. Here’s why.
When a person makes the choice to not save in order to spend for today, they are missing the opportunity for their money to grow and compound over time towards a nice retirement nest egg. Their opportunity costs may be giving up a nicer retirement for immediate gratification today. For the person who decides to eat lunch every day at a restaurant rather than packing a lunch is potentially giving up the opportunity to save more for retirement, their children’s college or another goal that they “wish” they could achieve, but just can’t “afford”.
The truth is that we prioritize what we can afford and what we think we can afford. A great example is the person that says they can’t afford to save for retirement but they can afford to pay over $100 for their smartphone plan, $75 for cable TV, and daily coffees and lunches. This is an example of opportunity costs. In this case the person is willing to forgo saving for retirement in lieu of watching TV, talking on the phone and drinking coffee.
It doesn’t mean that these things are bad; it simply means what a makes a priority becomes what they can afford.
The crux of this article is to help our readers think about their own opportunity costs and what they’re giving up in choosing another alternative. When it comes to saving money and being able to afford retirement, is there anything we can give up today in order to afford our future?
Sterling Raskie, MSFS, CFP®, ChFC®
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