Through the Lens of Opportunity Cost

Let’s say you want to spend money on something. It could be a number of things. A new car, a fresh wardrobe, private school for your kids, or maybe a trip to Disney. Let’s also say this particular item is important to you. If it’s important to you, it’s important (other people’s opinions don’t count). Let’s assume this purchase is highly important to you.

Where is the money going to come from? No, this isn’t a pay with debt vs. a pay with cash type conversation. Whether you use debt or pay with cash, the question still stands. Where is the money going to come from? There’s no free pass. This is the essence of opportunity cost. Every time we spend one dollar on item A, it’s one less dollar we can spend on items B, C, D, E, etc. Whenever we elect to spend money on something, something else suffers. I’m not saying this through the lens of negativity, but rather a simple reality.

Let’s say you’re planning to save up for a trip to Disney…..call it $8,000. If you really want to spend $8,000 on a trip to Disney, great. But where is the money going to come from? The simple (and recommended) answer is that you’ll set money aside in your sinking fund each month until you have enough. But where is the money going to come from? Maybe you decide to set aside $500/month for the next 16 months. The most important question isn’t whether or not you should do it, but rather what you’ll give up as a consequence. That’s $500 that won’t go somewhere else……so what is that something else?

This question gets to the heart of aligning our values with our behaviors. It forces us to look at each part of our life objectively, prioritize, then act. If you do that in earnest, you may decide not to go to Disney. Or you may immediately decide Disney is important, then discern what to give up in order to make it happen. But there’s a very real cost either way.

Here’s a quick idea of how to execute this:

1. Make a list of all the things in your financial life that are wants (i.e. not your basic needs to survive). This includes items such as dining out, travel, entertainment, extra debt payments, investing, etc.

2. Put a monthly dollar amount next to each of these items.

3. Prioritize them in order of most important to least important.

4. Determine which ones make the cut in your monthly budget this month (i.e. there’s enough money to fund it), and execute accordingly.

5. Repeat this process every so often to ensure you continue to align your values with your behavior.

When you do this, you’ll say yes to your yes’s and no to your no’s. It’s not always easy, but you will most certainly find more contentment and satisfaction when you know you’re pursuing what really matters to you.